BOJ stands pat on policy but says slowing emerging markets adding to pain

[TOKYO] The Bank of Japan said on Tuesday that slowing emerging market demand was putting further strains on the economy but held off on expanding stimulus, preserving its limited policy options in case an expected US rate hike sparks more global volatility.

BOJ Governor Haruhiko Kuroda maintained his optimism on Japan's economic outlook, saying that domestic demand remained firm despite external headwinds such as China's slowdown.

"The slowdown in emerging economies is already affecting Japan's exports and output. Even so, Japan's economy continues to recover moderately," Mr Kuroda told a news conference.

"Corporate revenues are at record-high levels, underpinning a steady improvement in job and income conditions," he said.

A run of poor data, including weak exports, feeble wage growth and soft household spending, has ramped up pressure on the BOJ to expand its already massive stimulus programme to reflate the economy, which contracted in the second quarter.

In a possible sign that its conviction about a solid third-quarter recovery may be wavering, the BOJ cut its assessment on exports and output to say they were "more or less flat." It also offered a bleaker view on overseas economies, warning that emerging markets were slowing.

"Japan's economy continues to recover moderately, although exports and output are being affected by the slowdown in emerging economies," it said in a statement after the policy meeting.

As widely expected, the BOJ maintained its pledge to increase base money at an annual pace of 80 trillion yen (S$938.7 billion) via aggressive asset purchases such as government bonds and some riskier assets such as exchange-traded equity funds.

In a sharp downgrade of views from just a few months ago, analysts now expect only a feeble economic rebound in the current quarter as China's slowdown hits exports, heightening market expectations that the BOJ may be forced to act again later this year.

"We're not in a recession, but the economy clearly lacks strength and prices are undershooting the BOJ's price target by a lot," said Hiroshi Miyazaki, senior economist, Mitsubishi UFJ Morgan Stanley Securities.

"The BOJ could ease again in early October, to avoid falling behind the curve," he said.

In a sign that cooling demand in China and elsewhere in Asia is taking a toll, a Reuters poll showed Japanese manufacturers'confidence slumped the most in a year in September.

Fears of a China-led slowdown prompted heavy selling in global markets earlier this month by investors already worried about whether the recovering US economy can withstand an interest rate hike which could come as early as this week.

A shift in the BOJ board's composition means if Kuroda were to pull the trigger, he could count on more votes than last October, when his unexpected proposal to expand stimulus won by a razor-thin margin.

But many BOJ policymakers are wary of acting now, concerned about the risk of diminishing returns if they expand the huge asset buying programme, which is already drying up bond market liquidity.

REUTERS