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BoJ lifts assessment of Japan's economic health

By Ben McLannahan
updated 5:40 AM EDT, Thu September 5, 2013
Haruhiko Kuroda unveiled what he called a
Haruhiko Kuroda unveiled what he called a "new phase" of "quantitative and qualitative monetary easing
STORY HIGHLIGHTS
  • The BoJ kept its main policy settings on hold, as it has done every month since April
  • Japanese Prime Minister Shinzo Abe wants to make Japan a more competitive place to invest and to do business
  • This week the BoJ reported that Japan's monetary base expanded 42 per cent from a year earlier in August

(Financial TImes) -- The Bank of Japan has lifted its assessment of Japan's economy, and underlined progress towards its price target by saying that inflation expectations "appear to be rising."

In an upbeat statement following a two-day policy meeting, the BoJ said the world's third-largest economy is "recovering moderately", boosted by a pick-up in exports and investment in fixed assets by companies on the back of higher profits. Public investment is also rising, it noted, while the housing sector is looking stronger.

As such, the BoJ kept its main policy settings on hold, as it has done every month since April, when governor Haruhiko Kuroda unveiled what he called a "new phase" of "quantitative and qualitative monetary easing." The aim is to hit a 2 per cent target for inflation by buying up huge amounts of assets, mostly longer-term bonds.

This week the BoJ reported that Japan's monetary base expanded 42 per cent from a year earlier in August, to Y172tn ($1.72tn), marking an all-time high for the sixth straight month. Meanwhile, the balance of current accounts deposited at the BoJ more than doubled to Y84tn, as banks parked proceeds of bond sales.

Analysts say that the BoJ is now at a delicate juncture in its easing programme, where it is hoping that so-called "bad inflation" caused by the drop in the yen since late last year is gradually replaced by "good inflation", signalling a virtuous cycle of demand.

For now, the evidence is mixed. The Japan-style core measure of consumer price inflation, which excludes food but not energy, climbed to 0.7 per cent in July, its highest level in nearly five years. The US-style core measure, which strips out both food and energy, is also on a rising trend but is still negative, at minus 0.1 per cent in July. Prices for items such as housing, furniture and medical care all fell from a year earlier.

Meanwhile, lending activity is still relatively subdued, with total loans rising 2.2 per cent in July. Base salaries are generally flat, or falling.

However, prices are moving in line with the policy board's forecasts, which means that the BoJ is under little pressure to do more to try to force the index higher. The onus now shifts to the government, say analysts, as it prepares to address some of the structural reforms set out in the growth strategy of Shinzo Abe, prime minister.

Abe wants to make Japan a more competitive place to invest and to do business, thus stimulating employment, incomes and consumption.

"[BoJ] policy board members are continuing to shun 'incremental easing'", said Izumi Devalier, economist at HSBC in Hong Kong. She expects the BoJ to leave monetary conditions unchanged for the remainder of the fiscal year to April.

"With the central bank out of the hot seat for now, the focus is squarely on the government."

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