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BOJ offers brighter view on economy, dashes near-term policy easing hopes

The Bank of Japan (BOJ) headquarters is seen through a cherry blossom tree in Tokyo April 9, 2008. REUTERS/Yuriko Nakao
The Bank of Japan (BOJ) headquarters is seen through a cherry blossom tree in Tokyo April 9, 2008. REUTERS/Yuriko Nakao

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) - The Bank of Japan kept policy steady on Wednesday and painted a slightly more optimistic view of the economy, dropping a reference to the country being in deflation and further dashing expectations it will offer more stimulus any time soon.

Governor Haruhiko Kuroda voiced confidence that Japan is on track to meet the bank's 2 percent price target, stressing that the economy will emerge from a temporary slowdown caused by last month's sales tax hike around summer as wages and jobs rise.

The upbeat comments came after the BOJ revised up its assessment on capital expenditure, long a soft spot in the economy, and removed a reference that Japan was in deflation for the first time since it deployed a massive stimulus program last April.

"Our quantitative easing policy is exerting its intended effects," Kuroda told a news conference, adding that household spending will remain firm despite the pain from the tax hike.

"Most of the wage negotiations have concluded, which shows that not only big firms but smaller firms are raising wages including regular pay. Improvements in job market conditions are continuing."

The yen rose to a 3-1/2 month high against the dollar and the euro after Kuroda's rosy projections on the outlook, which gave no hint of further monetary easing in the near term.

"From today's comments, I feel that the BOJ is very confident," said Takuji Aida, chief economist at Societe Generale Securities in Tokyo.

"We cannot expect any easing this year, but next year the BOJ will be able to confirm that the actual trend of consumer prices is weaker than expected and they will have to ease."

As widely expected, the BOJ maintained its monetary policy framework put in place last April, under which it pledges to increase base money by 60-70 trillion yen ($593-$691 billion) per year via aggressive asset purchases, largely of Japanese government bonds (JGBs).

In a statement issued after the decision, the BOJ removed a phrase describing Japan as being in deflation, underscoring its confidence about meeting its price target without additional stimulus.

Kuroda sounded unfazed by recent rises in the yen that were hurting Japanese stock prices, saying he saw no reason for the currency to keep rising as the BOJ maintains its ultra-loose policy even as the Federal Reserve tapers its asset purchases.

Some market players, however, took Kuroda's bullish comments as more a strategy to keep the positive psychology alive, since his stimulus program relies heavily on sentiment.

"I think they want to keep maintaining the inflation expectations and the growth expectations so that the Japanese economy will not lose momentum," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.

"He just continued to be hawkish, and I think the difference between the market economists and Kuroda remain wide."

RISKS LOOM

Japan's economy clocked its fastest pace of growth in more than two years in the first quarter as consumer spending jumped and business investment turned surprisingly strong ahead of a sales tax hike last month to 8 percent from 5 percent.

Some economists and politicians have argued the tax hike could dent the success achieved so far under premier Shinzo Abe through aggressive monetary easing and big fiscal spending.

But there is growing evidence that any damage will be limited. A Reuters survey showed companies expect sales to bounce back and are more willing to raise wages.

Businesses also raised machinery orders by the most ever in March, underscoring the BOJ's view that firms, many of which saw profits rise thanks to a weak yen and robust domestic demand, will finally ramp up spending to replace old facilities.

With consumer inflation having exceeded 1 percent, some academics feel the central bank should start considering how to exit its stimulus program.

"They should be talking about tapering at a minimum, and they should begin preparing financial markets for a regime after 2 percent, a shift from stimulating aggregate demand to stimulating aggregate supply," Dale W. Jorgenson, professor of economics at Harvard University, told Reuters on Wednesday.

Many mainstream Japanese economists, however, agree with the BOJ that talking about an exit now is premature with the recovery still fragile and bound with uncertainty.

For one, exports, which hold the key to whether Japan can sustain its recovery, have failed to pick up to the disappointment of the BOJ, which kept its view unchanged to say shipments have recently "leveled off more or less."

Exports rose 5.1 percent in the year to April, trade data showed on Wednesday, exceeding a median market forecast and a 1.8 percent increase in March. But they rose a meager 0.6 percent in April from the previous month on a seasonally adjusted basis.

Analysts say the BOJ may act if the trade performance falls short - a side effect of many firms moving production facilities offshore to escape years of the yen's strength.

Private-sector economists also remain deeply skeptical about the BOJ's rosy projection on prices, arguing that consumer inflation won't accelerate as quickly as the central bank expects in a country long mired in deflation.

($1 = 101.3450 Japanese Yen)

(Additional reporting by Stanley White, Kaori Kaneko and Lisa Twaronite; Editing by Kim Coghill)

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