BOJ to stand pat, stick to upbeat economy view despite tax rise

Thu Oct 3, 2013 7:31pm EDT
 
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By Leika Kihara

TOKYO (Reuters) - The Bank of Japan is expected to maintain its massive stimulus on Friday and reiterate its upbeat view that the economy is strong enough to weather next year's sales tax increase without additional monetary policy measures.

The nine-member board is also likely debate how the U.S. Federal Reserve's decision last month to delay tapering its own asset-buying program could affect capital flows and the global economic outlook.

At the two-day rate review concluding on Friday, the BOJ is widely expected to keep its monetary easing intact, under which it aims to double base money via asset purchases to meet its target of lifting inflation to 2 percent in roughly two years.

The policy review follows Prime Minister Shinzo Abe's decision on Tuesday to proceed with a planned increase in the sales tax to 8 percent from 5 percent next April and cushion its impact with a 5 trillion yen ($51 billion) stimulus package.

BOJ Governor Haruhiko Kuroda is expected to welcome Abe's decision as an important first step in reining in Japan's huge public debt which, at double the size of its $5 trillion economy, is the biggest among major industrialized nations.

The BOJ expects the sales tax increase to shave about 0.7 percentage point off growth. For now, it sees no need to expand its stimulus further, confident that the world's third-largest economy can withstand the hit.

"Our main scenario is that overseas economies will gradually pick up as the U.S. and European economies improve," Kuroda said in a speech two weeks ago. "That will support increases in exports and output, as well as a pick-up in capital expenditure in Japan."

Sources familiar with the BOJ's thinking say given the tax rise is factored into its outlook, the government's stimulus package could see the central bank revise up its long-term growth forecasts, due for release on October 31.   Continued...

 
A pedestrian walks past the Bank of Japan headquarters in Tokyo August 8, 2013. REUTERS/Yuya Shino