[TOKYO] The Bank of Japan held off on expanding stimulus on Wednesday, even as slumping exports and falling oil prices threaten its rosy projection that the economy is on track to hit its ambitious 2 per cent inflation target next year.
But lingering fears of recession will keep the central bank under pressure to ease at a more crucial meeting on Oct 30, when it is expected to cut its long-term economic and price forecasts, analysts say.
For now, the BOJ maintained its optimistic view that while exports and output have been hurt by slowing emerging market growth, Japan's economy continues to recover moderately.
As widely expected, the central bank maintained its pledge to increase base money at an annual pace of 80 trillion yen (S$948.3 billion) through aggressive asset purchases. "The decision came as expected. I still expect the BOJ will ease policy further later this month," said Yasunari Ueno, chief market economist at Mizuho Securities. "If the BOJ stands pat later this month even as cuts its bullish forecasts, investors would take it as a sign its commitment to hit 2 per cent inflation has weakened," he said.
Japan's economy shrank in April-June and some analysts expect another contraction in July-September on slumping global demand and weak consumption.
Core consumer prices slid in August to mark the first annual drop since the BOJ deployed its massive stimulus programme more than two years ago, casting doubt on whether heavy money printing alone can accelerate inflation to 2 per cent.
BOJ Governor Haruhiko Kuroda may struggle to convince markets at his post-meeting news conference that the economy can emerge from the doldrums without additional monetary support, analysts say.
In a semi-annual review of its forecasts on Oct 30, the BOJ is set to slash its economic growth forecasts and push back the timing for achieving its price target, sources say.
The BOJ now expects inflation to hit 2 per cent by around September next year, a forecast many analysts criticise as too ambitious.
A Reuters poll in early September, before the recent spate of weak data, showed most economists did not expect further easing until 2016.