August 5, 2013 / 8:15 AM / 6 years ago

BOJ to keep monetary policy on hold as economy improves

TOKYO (Reuters) - The Bank of Japan is expected to keep monetary policy on hold at a review this week, as its unprecedented quantitative easing and government stimulus gradually spread through the economy.

A man walks past the Bank of Japan headquarters in Tokyo July 5, 2013. REUTERS/Toru Hanai

Since the BOJ’s last meeting there have been improvements in the economy, including the first rise in core consumer prices in more than a year, the first increase in summer bonuses in three years and a decline in the jobless rate to a 4-1/2-year low.

Many members of the BOJ are confident that the economic recovery is on track, but some officials want to see more data to measure the strength of business investment, sources familiar with the BOJ’s thinking said.

The BOJ has projected that Japan’s economy will resume a moderate recovery and last month it said growth was “picking up,” which marked the seventh consecutive month of upgrades.

The two-day review will conclude on Thursday.

The BOJ is widely expected to keep monetary policy steady by maintaining its pledge of increasing base money, or cash and deposits with the central bank, at an annual pace of 60 trillion to 70 trillion yen ($600 billion-$700 billion).

Policy board members could discuss whether or not to upgrade their assessment of the economy given that there are growing positive signs from prices, the labor market, wages and consumer spending.

However, there are still some areas of concern, sources say.

Some officials were disappointed by the pace of export growth, while others pointed to risks posed by overseas economies should growth in the United States or China disappoint.

There are also mixed signals on business investment.

Shipments of capital goods, which can help gauge the strength of capital expenditure, tumbled 12.1 percent in June versus a flat reading in May, trade ministry data showed on Monday.

A separate survey released on Monday, however, was more optimistic. Large companies plan to increase capital expenditure by 10.3 percent in the fiscal year that started in March, according to the state-backed Development Bank of Japan.

That is faster than a 2.9 percent increase in the previous fiscal year, the survey showed.

Many within the BOJ place a lot of importance on capital expenditure, sources say. They argue that a solid increase in business investment is needed to ensure a self-sustaining economic recovery.

Faced with inconclusive data, some policymakers may reserve judgment on their outlook for the economy until the release next week of April-June gross domestic product and machinery orders, which is a leading indicator of business spending.

The central bank stunned markets on April 4 with an intense burst of stimulus, pledging to double its holdings of government bonds and boost purchases of risky assets to meet its 2 percent inflation target in roughly two years.

The decision, coupled with Prime Minister Shinzo Abe’s reflationary policies, is boosting sentiment among households and the corporate sector.

Editing by Simon Cameron-Moore

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