BOJ keeps policy steady, Kuroda likely to flag distant stimulus exit

By Leika Kihara and Stanley White

TOKYO (Reuters) – Japan’s central bank kept monetary settings unchanged on Friday and stuck to its upbeat view on the economy, underscoring its conviction that its massive stimulus program is helping drive inflation toward its elusive target.

With fears of a global trade war and a strong yen clouding the outlook, however, Bank of Japan Governor Haruhiko Kuroda is likely to use his post-meeting briefing to reassure markets the central bank is in no rush to dial back ultra-easy policy.

“Japan’s economy is expanding moderately, with a virtuous cycle from income to spending operating,” the BOJ said in a statement announcing the policy decision.

In a widely expected move, the BOJ maintained its pledge of guiding short-term interest rates at minus 0.1 percent and the 10-year government bond yields around zero percent.

The decision came in the wake of data showing workers’ wages fell at the fastest pace in six months, in a sign that consumption will lose momentum this year and weigh on an economy now enjoying its longest run of growth in 28 years.

Kuroda, who is set to serve another term, rattled markets last Friday by flagging for the first time the prospect of a stimulus exit if 2 percent inflation were met in fiscal 2019 – a remark he later tempered.

The BOJ is caught in a bind. Inflation remains well below its 2 percent target even as the economy enjoys its longest growth run in 28 years, keeping it from dialing back stimulus despite the rising costs of prolonged easing.

That leaves Kuroda with a tough task in his second term beginning in April, which is to navigate the long road toward a stimulus exit with subtle hints without stoking market fears of an imminent policy shift.

A majority of economists polled by Reuters expect the BOJ to keep its long-term rate target unchanged this year, though 40 percent expect a hike.

The March rate review will be the final one before a BOJ leadership change, in which two new deputy governors will replace the departing officeholders on March 20.

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