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Bank of Japan raises price outlook but maintains ultra-easy policy

An evening commuter walks past the Bank of Japan (BOJ) headquarters in Tokyo, Japan, on Sept. 27, 2021.
oru Hanai | Bloomberg | Getty Images

The Bank of Japan upgraded its inflation forecasts on Tuesday and flagged heightening chances the recent commodity-driven price hikes will broaden, the latest sign of its conviction Japan is emerging
sustainably out of deflation.

The central bank also revised up next fiscal year’s growth forecast and offered a more upbeat view on the economy than three months ago, taking in stride the recent spike in omicron coronavirus variant cases at least for the time being.

But with inflation set to remain below its 2% target in the coming years, the BOJ stressed its resolve to maintain its ultra-loose monetary policy even as its global counterparts move toward exiting from crisis-mode policies.

“The BOJ is likely to stand pat on policy for the foreseeable future, unless the government piles pressure on it to ease the pain of commodity-driven inflation exacerbated by a weak yen. That may prompt the BOJ to fine-tune its policy,” said Izuru Kato, chief economist at Totan Research.

As widely expected, the BOJ left unchanged a -0.1% target for short-term interest rates and a pledge to guide long-term rates around 0% at a two-day meeting that ended on Tuesday.

In a quarterly outlook report, the BOJ revised up its inflation forecast for the year beginning in April to 1.1% from the previous estimate of 0.9%.

It also slightly raised its inflation forecast for fiscal 2023 to 1.1% from 1.0%.

“Risks to prices are generally balanced,” the BOJ said in the report. That compared with its assessment in October, which said risks were skewed to the downside.

As wage increases give households more purchasing power, a broader range of firms will raise prices. That, in turn, will push up inflation and heighten public perceptions that prices will rise further, the BOJ said.

“Inflation expectations are heightening moderately,” the BOJ said, warning of the risk that price hikes could come faster than expected if global commodity costs remain high.

On Japan’s economy, the BOJ said its “recovery was becoming clearer” as the damage from the Covid-19 pandemic eased, a sign it was taking the recent spike in omicron new coronavirus cases in stride. That was a more upbeat assessment than in October, when it said the economy was “picking up as a trend.”

The BOJ cut its economic growth forecast for the year ending in March as curbs on activity to combat the pandemic dampened consumption and affected supply chains, hitting output.

But it revised up next fiscal year’s growth projection to a 3.8% expansion from 2.9% forecast in October, taking into account the boost from the government’s stimulus package.

A spike in wholesale inflation and rising import costs from a weak yen have led to price hikes for a broad range of goods, hitting households at a time wage growth remains slow.

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