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Bank of Japan raises growth outlook

The Bank of Japan kept monetary policy on hold and turned optimistic on the growth outlook as a slide in the yen sharply improves the outlook for Japan in 2017.

Japan’s economy is “likely to turn to a moderate expansion” with rising domestic demand, large-scale fiscal stimulus and growing exports, the central bank said.

Its comments highlight the dramatic turnround from September — when despairing analysts said the BoJ was out of options to stimulate the economy — to widespread optimism after the election in November of Donald Trump as president of the US.

The BoJ’s stance is likely to herald a long period of unchanged policy as governor Haruhiko Kuroda waits for his massive monetary stimulus to reignite inflation.

“The premium of US benchmark rates over comparable Japanese rates is set to favour a significantly weaker yen over the next several quarters than prevailed in most of 2016,” said Bill Adams, senior international economist at PNC in Pittsburgh.

But he added: “Until Japan shows signs of a sustained and self-reinforcing cycle of rising wages and consumer prices, the Bank of Japan will leave policy in its current, highly expansionary stance.”

The central bank said on Tuesday that it would keep overnight interest rates at minus 0.1 per cent and cap 10-year bond yields “at around zero”. It will continue to purchase government bonds at a pace of ¥80tn a year, equities at a pace of ¥6tn annually and corporate bonds at a pace of ¥3.2tn.

Rising interest rates around the world have put pressure on the BoJ’s yield curve cap in recent weeks, prompting market speculation that the central bank could be obliged to raise it at some point in order to avoid buying larger quantities of bonds.

In the wake of the decision, 10-year yields fell from 0.08 per cent to 0.06 per cent. At a press conference later on Tuesday, Mr Kuroda is likely to face questions about how high the BoJ is willing to let yields rise and how aggressively it will purchase bonds in response.

Inflation in Japan remains close to zero, almost four years after the BoJ began an enormous monetary stimulus, as low oil prices and a period of yen strength dragged down prices.

Those trends are expected to reverse in 2017 after Mr Trump’s election prompted expectations of faster US growth, higher US interest rates and thus a weaker yen against the dollar. The yen was little changed on Tuesday.

“The year-on-year rate of change in the consumer price index is likely to be slightly negative or about 0 per cent for the time being,” said the BoJ. “As the output gap improves and medium- to long-term inflation expectations rise, it is expected to increase towards 2 per cent.”

Via FT