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Bank of Japan keeps policy steady after Abe's fiscal package

Stimulus package, progress in US-China trade talks, signs of bottoming of global slowdown give BOJ breathing space

BOJ officials see a sizeable impact from PM Shinzo Abe's US$120 billion fiscal spending.


THE Bank of Japan left policy untouched on Thursday as a government stimulus package, progress in US-China trade talks and signs of a bottoming of the global slowdown brightened the economic outlook.

The central bank maintained its target for interest rates and asset purchases, according to its statement on Thursday, in line with the view of all 45 economists surveyed by Bloomberg. The BOJ also kept its guidance on policy unchanged and outlined details of a stock-fund lending scheme aimed at improving the sustainability of its easing programme.

The BOJ has now reached the end of a precarious year without having to delve deeper into its depleted ammunition, despite a wave of easing by central banks when the global deceleration looked set to deepen sharply.

That wave has largely come to an end with the Federal Reserve pausing its interest rate cuts and new European Central Bank chief Christine Lagarde signalling the worst is likely over for the eurozone's economy.

The phase one US-China trade deal, a stabilising of global manufacturing readings and a stronger mandate for the UK to leave the European Union have given governor Haruhiko Kuroda extra breathing space.

The bank can now sit tight and assess how Prime Minister Shinzo Abe's US$120 billion fiscal package will prop up growth in an economy contending with a sales tax increase, an export slump and destruction caused by a super typhoon.

The recent developments were hinted at in the statement. The BOJ no longer described overseas risks to the economy as increasing, but it said they remained significant, signalling the board remains on guard. The central bank also said domestic demand would be supported by "active government spending."

BOJ officials see a sizeable impact from Mr Abe's fiscal spending, which is expected to boost the economy by 0.35 percentage points, according to economists surveyed.

The government on Wednesday estimated Japan's growth to be 1.4 per cent in the year starting in April, increasing the likelihood that the BOJ will upgrade its projection of 0.7 per cent in a quarterly report next month.

"The BOJ is indicating nascent optimism for the outlook of the economy. This statement adds to reasons not to expect further easing for a while," said Tetsufumi Yamakawa, head of Japan research at Barclays PLC, adding that it seemed too early to be less pessimistic given the continued uncertainties that remain about trade, Brexit and Japan's economy.

"It's interesting to see how dramatically the BOJ changed its tone on the economy over the past several months. One of the biggest reasons is of course the yen's depreciation and rising stocks," Mr Yamakawa said.

In another reminder of the mounting side effects of the BOJ's massive easing programme, the bank released details of a lending programme for exchange-traded funds. As part of its large-scale asset buying, the central bank has become by far the largest owner of ETFs in Japan. The lending programme should help improve liquidity in that market.

"On ETF lending, it's not a game changer at all. I think the BOJ should explain more fundamental issues like why they are continuing to buy stocks when stock prices are high and how they are going to deal with all the stocks in the end," Mr Yamakawa said. BLOOMBERG