By Leika Kihara and Stanley White
TOKYO (Reuters) - The Bank of Japan maintained its ultra-loose monetary policy on Friday and downgraded its view on inflation in a fresh blow to its long-held 2 percent price goal, further complicating the central bank's path to rolling back its crisis-era stimulus.
Markets are on the lookout for clues from BOJ Governor Haruhiko Kuroda's post-meeting briefing on how long the central bank could hold off on whittling down stimulus given recent disappointingly weak price growth.
As widely expected, the Bank of Japan kept its short-term interest rate target at minus 0.1 percent and a pledge to guide 10-year government bond yields around zero percent.
The move contrasts with the European Central Bank's decision to end its asset-purchase programme this year and the U.S. Federal Reserve's steady rate increases, which signalled a break from policies deployed to battle the 2007-2009 financial crisis.
"Consumer price growth is in a range of 0.5 to 1 percent," the BOJ said in a statement accompanying the decision. That was a slightly bleaker view than in the previous meeting in April, when the bank said inflation was moving around 1 percent.
The BOJ stuck to its view the economy was expanding moderately, unfazed by a first-quarter contraction that many analysts blame on temporary factors like bad weather.
But it also maintained its cautious assessment on prospects for hitting its elusive 2 percent inflation target, saying that inflation expectations were moving sideways.
The central bank said it will continue buy bonds so that the balance of its holdings increases at an annual pace of 80 trillion yen ($722.67 billion).
The delay in pulling out of crisis-era stimulus would leave the BOJ with a lack of ammunition to fight another economic downturn, even as its U.S. and European peers start restocking their tool-kit.
"It is almost certain the BOJ will cut its inflation forecasts at its next meeting in July," when it conducts a quarterly review of its projections, said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
"The BOJ is already stealth tapering and it wants to sound out markets for an exit, but it may have to wait until inflation gets above at least 1 percent."
The central bank has been slowing its bond buying to around half the pace it commits to purchase annually, arguing that it can keep long-term rates around its yield target with less purchases due to its dominance in the bond market.
In a sign of concern over feeble price growth, BOJ board member Goushi Kataoka - a consistent, sole dissenter to keeping policy steady - said the bank should ramp up stimulus if it offers a bleaker view on inflation expectations in the future.
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Japan's economy shrank an annualised 0.6 percent in the first quarter, though many analysts expect growth to bounce back on solid exports and capital expenditure.
Before the latest contraction, the economy benefited from a global exports boom that continues to underpin a synchronized uptick in world growth.
Core consumer prices rose 0.7 percent in April from a year earlier, slowing for the second straight month, casting doubt on the BOJ's view a solid recovery will prompt firms to raise wages and help accelerate inflation to its 2 percent target.
Given weak inflation, the BOJ may look more closely into structural factors that may be holding back price growth at its July meeting, according to sources familiar with its thinking.
"No matter how long the BOJ continues its current easing, it won't be able to achieve 2 percent inflation target for the foreseeable future," said Izuru Kato, chief economist at Totan Research.
"The Fed and ECB are moving flexibly to rectify excessive monetary stimulus as their economies expand, but the BOJ would lack such flexibility in guiding policy as long as it persists in achieving the 2 percent inflation target."
Markets are also focusing on what Kuroda could say on escalating trade frictions and U.S. President Donald Trump's threat to impose tariffs on auto imports - both risks to the export-reliant economy.
The International Monetary Fund warned on Thursday that Trump's new import tariffs threaten to undermine the global trading system, prompt retaliation by other countries and damage the U.S. economy.
($1 = 110.7000 yen)
(Additional reporting by Tetsushi Kajimoto and Kaori Kaneko; Editing by Sam Holmes & Shri Navaratnam)
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