Japan's central bank holds course amid signs of improvement

The Bank of England's rate meeting is scheduled for later today. 

 

The economy had "stopped weakening," largely as exports appeared to have stop falling and overseas economies showed signs of pickingup, the Bank of Japan said at the close of a two-day meeting.

It reiterated its recently adopted goal of raising inflation to 2per cent in the face of persistent deflationary pressures.

"The Bank will pursue aggressive monetary easing, aiming to achieve the above-mentioned price stability target through avirtually zero interest rate policy and purchases of financial assets as long as the Bank judges it appropriate," it said.

Signs of improvement include a continued increase in public investment while "housing investment has generally been picking up" and private consumption had "remained resilient," it said.

However, business fixed investment, the spending by companies on equipment and structures, had "shown some weakness," it said.

The bank said the economy "is expected to level off more or lessfor the time being" before returning to "a moderate recovery path."   Its outlook also predicted deflation persisting before returning to a rate of about 0 per cent.

The announcement came as bank Governor Masaaki Shirakawa was to step down March 19 along with two deputies and be replaced by Haruhika Kuroda, former president of the Asian Development Bank and a long-standing advocate of aggressive monetary easing.

Since taking office in December, Prime Minister Shinzo Abe has encouraged the bank to pursue more monetary easing and to raise its inflation target from 1 to 2 per cent, provoking some international concern of political interference in the bank's monetary policy.

Moody's Analytics associate economist Fred Gibson said in a note that under the new governor Kuroda, the Bank of Japan will increase quantitative easing to lift inflation toward the 2 per cent target. Markets reacted favourably to Kuroda's nomination Thursday, sending the yen down 0.6 per cent against the US dollar and the Nikkei stock index 2.6 per cent higher. 

Kuroda's appointment represents part of the new government's effort to end Japan's 20-year slump. Deflation has driven up real interest rates, blunting any monetary incentive for households and business to spend more. The incoming governor will need to try new approaches to boost the economy.