BoJ maintains monetary policy despite missing inflation target

The Bank of Japan has kept monetary policy on hold even as its initial two-year deadline for increasing inflation to 2 per cent passed with prices stuck at zero.

Speaking at a press conference after the BoJ's regular policy meeting, Haruhiko Kuroda, the BoJ governor, said public expectations of inflation are holding up and that the central bank is still on course.

Mr Kuroda's comments suggest the BoJ is unlikely to ease further when it updates its economic forecasts this month. However, missing the two-year timeframe is a threat to the BoJ's credibility, even if it is largely due to falling oil prices. Many analysts think the central bank will be forced to take further easing action this year.

The BoJ launched a massive monetary stimulus on April 4 2013, promising to double the country's monetary base. It then shocked financial markets last October by accelerating the rate of purchases to Y80tn a year. The BoJ kept that purchase target unchanged on Wednesday.

Mr Kuroda said he does not now see the kind of risks that prompted the expansion of the programme last October.

"Back then, there had been a prolonged effect from the tax hike, and consumption has been quite weak in part due to poor weather. Consumer inflation was weakening every month due to slumping oil prices," he said.

"When you look at conditions now, inflation expectations have held up, with some indicators showing them strengthening. For now, the risks we saw back in October last year have subsided."

When Mr Kuroda launched the programme two years ago, he pledged to hit a 2 per cent inflation target "at the earliest possible time, with a time horizon of about two years". On Wednesday, he insisted that nothing had changed, and the BoJ is ready to act "without hesitation" if necessary to hit the target.

The BoJ policy board voted to keep policy on hold by a majority of 8-1 but Takahide Kiuchi, the lone dissenter, toughened his objection to call for a taper of BoJ asset purchases.

Whereas previously Mr Kiuchi called for fixing a two-year limit on asset purchases, he now said the 2 per cent goal should be made a medium to long-term objective and called for an immediate reduction in the pace of purchases to Y45tn a month.

Mr Kiuchi's dissent shows the continuing doubts of some BoJ officials about the aggressive easing. However, a firm majority of the policy board support Mr Kuroda, and the government of Shinzo Abe is likely to appoint new members to ensure that BoJ policy stays easy.

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