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[TOKYO] The Bank of Japan kept monetary policy steady and gave a more upbeat view of the economy on Tuesday, reinforcing market expectations that its future policy direction could be an increase - not a cut - in interest rates.
Reflecting a pick-up in emerging Asian demand and factory output, the central bank upgraded its language to signal its confidence that the economy is headed for a steady recovery.
"Japan's economy continues to recover moderately as a trend," the BOJ said in a statement announcing the policy decision. It also offered a brighter view on exports and output to say they are picking up.
As widely expected, the BOJ kept unchanged its pledge to guide short-term rates at minus 0.1 per cent and the 10-year government bond yield around zero per cent.
At the previous meeting on Nov 1, the BOJ said the economic trend was for moderate recovery, but slowing emerging market demand was weighing on exports and output.
Financial markets are focusing on what BOJ Governor Haruhiko Kuroda will say at his post-meeting news conference about the recent rise in yields.
Japanese long-term interest rates have risen in tandem with global bond yields on expectations of steady US interest rate hikes and the perceived inflation-stoking policies of incoming US President Donald Trump.
This has tested the BOJ's resolve to cap the 10-year Japanese government bond (JGB) yield around its zero per cent target.
That in turn has led to some market expectations the BOJ may raise its target for the 10-year JGB yield, which briefly hit 0.1 per cent last week, as early as next year.
While recent yen falls have heightened hopes for a rebound in exports, BOJ officials are by no means complacent on the outlook as any remarks by Mr Trump warning against further dollar gains could reverse the positive market tide.
Mr Kuroda is thus likely to reiterate that risks to the economic and price outlook are skewed to the downside.
Market expectations of additional monetary easing have receded after the BOJ revamped its policy framework in September to one better suited to a long-term battle against deflation.
With inflation stubbornly shunning its 2 per cent target, however, the BOJ is in no rush to raise its 10-year JGB yield target, and sees any such move as a long-term option.
Still, the central bank is more open to discussing the idea and may contemplate raising the target as early as next year if long-term rates reflect clear improvements in the economy and keep rising, sources have told Reuters.