BOJ keeps policy steady, takes upbeat tone on consumption, capex

By Leika Kihara and Stanley White

TOKYO (Reuters) - The Bank of Japan kept monetary policy steady on Thursday despite growing signs of strength in the economy, signalling that it was in no rush to edge away from crisis-mode stimulus with inflation still distant from its 2 percent target.

As widely expected, the BOJ kept its short-term interest rate target at minus 0.1 percent and the 10-year bond yield target around zero percent - wrapping up a year in which the central bank made no change to policy.

BOJ Governor Haruhiko Kuroda told a news conference he had no plan to change the current policy framework now, saying that dwindling profits at financial institutions resulted not simply from ultra-low interest rates but structural factors such as a dwindling population.

"We made clear in our comprehensive assessment last September that we will guide the yield curve (a measure of future interest rates) to the most appropriate shape looking comprehensively at various factors, including financial conditions. We haven't made any changes to that idea since then," Kuroda said.

Thursday's decision to stand pat on monetary policy was deided in an 8-1 vote. Board newcomer Goushi Kataoka dissented for the third straight meeting, arguing that the BOJ should buy bonds so that yields for durations of 10 years and longer fall further.

"As long as the government keeps a slightly expansionary fiscal policy the BOJ will keep long-term yields low," said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management.

"We do, however, need to pay attention to the impact quantitative easing is having on regional banks," he said, adding that debate on whether to raise the yield targets could emerge in the latter half of next year.

UPBEAT ON CONSUMPTION, CAPEX

The BOJ has been caught in a dilemma as strength in the economy fails to translate into higher prices.

After three years of heavy money printing failed to fire up inflation, the BOJ revamped its policy framework last year to target interest rates instead of the rate at which it bought up financial assets.

Some BOJ policymakers have recently expressed concerns over the demerits of easing, such as the hit to bank margins, in a sign the central bank may ponder raising its yield targets or slow purchases of risky assets next year.

Japan's economy grew an annualised 2.5 percent in July-September to mark a seventh straight quarter of expansion thanks to robust exports and capital expenditure.

But core consumer inflation remains stuck at 0.8 percent and firms polled by the BOJ expect no major pick-up in price growth in coming years.

($1 = 112.9300 yen)

(Additional reporting by Tetsushi Kajimoto and Thomas Wilson; Editing by Eric Meijer)