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Bank of Japan signals continued stimulus

The Bank of Japan is keeping monetary policy on hold as it seeks to avoid speculation about an early exit from stimulus and keep inflation moving towards its 2 per cent goal.

Japan’s central bank said on Thursday it would leave overnight interest rates at minus 0.1 per cent, cap 10-year bond yields at about zero per cent, and continue to purchase government bonds at a pace of ¥80tn ($720bn) a year.

The steady-as-she-goes message signals the BoJ’s determination to sustain its monetary stimulus despite an improving economic outlook.

While almost all analysts expected policy to be kept on hold, some believed the BoJ might drop its ¥80tn purchase target because it already owns a large share of the market and the yield curve cap makes a precise figure redundant.

However, some BoJ officials believe the volume of purchases is more important than the interest rate, and they have been reluctant to do anything markets might interpret as preparation for tighter policy.

“To start debate [about exit strategy] now would invite confusion from the market and thus it’s premature,” said governor Haruhiko Kuroda in a press conference. “The time to start on exit strategy is when we achieve the 2 per cent objective.”

The BoJ’s policy board voted for the move by a majority of seven to two. The two dissenters, Takehiro Sato and Takahide Kiuchi, will step down from the board this summer.

“Japan’s economy is likely to continue expanding and maintain growth at a pace above its potential,” the bank said in its quarterly outlook report published alongside the monetary policy decision.

It said inflation was likely to keep rising but the risks were to the downside. “On the price front, the momentum towards achieving the price stability target of 2 per cent is maintained, but is not yet sufficiently firm, and thus developments in prices continue to warrant careful attention.”

The policy board slightly raised its growth forecast for the year to March 2018, from 1.5 per cent to 1.6 per cent, but trimmed its inflation forecast from 1.5 per cent to 1.4 per cent.

Japan’s economy has gained speed because of a fall in the yen after the election of Donald Trump as US president. The unemployment rate has fallen to a 22-year low of 2.8 per cent.

Despite that, inflation has been slow to respond, with headline consumer prices up 0.3 per cent in February against the year earlier. Fresh data on inflation and unemployment is expected on Friday.

“There’s a high chance of achieving 2 per cent inflation in the year to March 2019, but it may also take longer than that to go above 2 per cent stably,” said Mr Kuroda.

The yen was trading slightly weaker at ¥111.3 against the dollar following Mr Kuroda’s press conference. The Topix share index was little changed at 1,537.