BoJ raises GDP forecast, holds line on inflation

The Bank of Japan stopped short of officially forecasting it could raise inflation to 2 per cent in two years after a review on Thursday, but said it was on track to reach its target and would maintain its massive stimulus as long as needed.

The central bank did revise up its economic growth forecast for the 2014 fiscal year beginning next April to 1.5 per cent, judging the world's third-largest economy could keep growing above its potential despite a sales tax increase next year.

As widely expected, the BoJ had earlier kept intact its intense monetary stimulus launched in April, under which it aims to double base money via asset purchases to meet its target of lifting inflation to 2 per cent in roughly two years.

It decision came after the US Federal Reserve maintained its own massive bond-buying programme.

In its semi-annual outlook report, the BoJ kept its forecasts for core consumer inflation in fiscal 2014 and 2015 at 1.3 per cent and 1.9 per cent respectively, excluding the increase in the sales tax, a sign it is on track to meet its goal.

Even though it did not formally forecast inflation reaching 2 per cent, economists worry the BoJ is expecting too much from government stimulus designed to offset the impact of the rise in the 5 per cent sales tax rate to 8 per cent next April.

Some in the BoJ are known to share the market's doubts.

"The BoJ is being too optimistic given there will be a sales tax hike and could be forced to downgrade these numbers later," said Takuji Aida, chief economist at Societe Generale Securities.

"The BoJ may have to ease policy again in the second quarter of next year, around the time of the tax hike."

Tax rise impact
The economy expanded for a third straight quarter in April-June as Prime Minister Shinzo Abe's stimulus policies boosted business sentiment and household spending.

Manufacturing activity grew at the fastest pace in more than three years and factory output grew at the fastest pace in almost four years in October, a survey showed, a sign of firm domestic demand ahead of the sales tax increase.

The BoJ revised up growth for the 2014 fiscal year to 1.5 per cent from the current 1.3 per cent, reflecting the expected boost to the economy from a 5 trillion yen ($51 billion) package planned by Abe to cushion the impact of the tax hike.

And it maintained its fiscal 2015 forecast for 1.5 per cent growth.

But a slump in exports has cast doubt on the central bank's view that global growth will pick up in time to offset an expected downturn in household spending when the tax rate rises.

Wage earners' total cash earnings rose just 0.1 per cent in the year to September, data showed on Thursday, reflecting the slow progress in achieving big increases in wages needed to end 15 years of deflation.