BOJ sounds most upbeat on economy in nine years, policy unchanged

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan kept monetary policy unchanged on Thursday and offered its most optimistic assessment of the economy in nine years, signalling its confidence that a pick-up in overseas demand will help sustain an export-driven recovery.

But the central bank slightly cut its inflation forecast for this fiscal year in a quarterly review of its projections, suggesting that it will maintain its massive monetary stimulus for the time being to achieve its ambitious 2 percent target.

"The inflation and growth projections, as well as the upgrade of its economic assessment, were all in line with market forecasts, so there was no surprise at this meeting," said Yasunari Ueno, chief market economist at Mizuho Securities.

"As long as the economy maintains its momentum, the BOJ will likely stand pat at least until next spring, when Kuroda serves out his term."

BOJ Governor Haruhiko Kuroda reminded markets the Japanese central bank is nowhere near an exit from its massive stimulus.

"We expect inflation to accelerate toward 2 percent but currently, inflation is around zero percent," Kuroda told reporters after the policy meeting.

"Talking about a specific exit strategy now would cause undue confusion in markets," he said. "The prerequisite for such debate to happen is for inflation to achieve 2 percent."

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

"Japan's economy has been turning toward a moderate expansion," the BOJ said a quarterly review of its long-term economic and price projections, compared with the previous month's view that it was "improving moderately as a trend."

It was the first time since March 2008 the BOJ used the word "expansion" in describing the state of the economy, signalling its conviction that the recovery was gaining momentum and that it sees no need for additional stimulus.

DOUBTS ABOUT INFLATION

In the quarterly review, the BOJ cut its core consumer inflation forecast for the year ending in March 2018 to 1.4 percent from 1.5 percent, blaming stubbornly weak services and durable goods prices.

The BOJ also complained that public perceptions of future price rises remained weak with no clear signs of a pick-up.

But it maintained its projection that inflation will reach 2 percent during the fiscal year ending in March 2019 on the view that a tightening job market would gradually push up wages.

Many analysts remain doubtful inflation will accelerate as quickly as the BOJ projects, with slow wage growth keeping households from boosting spending.

"Consumer price growth is around zero, which makes all of these price forecasts look overly optimistic," said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

"The BOJ upgraded its economic assessment, but this is due more to overseas demand. Japan's labour market is tight, but retailers still want to cut prices."

Japan's economy has shown signs of life, as exports rose the most in over two years in March and manufacturers' confidence hit the highest since the global financial crisis a decade ago.

But core consumer prices for February rose just 0.2 percent from a year earlier, as weak private consumption has discouraged companies from raising prices.

While a pioneer in deploying unorthodox stimulus, the BOJ is likely to lag behind its peers in withdrawing monetary support.

The U.S. Federal Reserve is already embarking on interest rate hikes, while the European Central Bank may send a small signal in June towards reducing stimulus.

Most analysts polled by Reuters expect the BOJ's next move to be a tightening of monetary policy, though many do not expect it to happen until next year at the earliest.

After more than three years of huge asset purchases failed to accelerate inflation, the BOJ revamped its policy framework last September to one aimed at capping long-term interest rates.

(Additional reporting by Stanley White, Tetsushi Kajimoto and Minami Funakoshi; Editing by Sam Holmes)