A security officer is seen through a chain link as he stands guard outside the Bank of Japan headquarters in Tokyo, March 31, 2016( REUTERS / Yuya Shino)
Tokyo: The Bank of Japan is set to upgrade its economic assessment as early as next week to signal its growing conviction the recovery is gathering momentum, people familiar with its thinking told Reuters, reinforcing expectations its next move would be to tighten monetary policy.
It would follow an upward revision in April, when the central bank signalled that growth was shifting into higher gear after emerging from the doldrums.
But inflation remains stubbornly weak and may force the BOJ to again cut its price forecast at a quarterly review of its projections in July, the people said.
The disconnect between growth and inflation suggests the BOJ will be in no rush to withdraw the massive monetary support put in place to meet its 2 percent inflation target, analysts say.
“Almost all components of the economy are performing well. There’s no doubt the economy is in pretty good shape,” one of the people said. “Inflation, on the other hand, has been underperforming,” the person added, a view echoed by two other sources.
At the previous policy meeting in April, the BoJ offered the most optimistic assessment in nine years to say the economy has been “turning toward a moderate expansion.”
The central bank will brighten the language to describe the economy as “expanding moderately,” either at a rate review on June 15-16 or the following meeting in July, the people said.
The change underscores a growing view within the BOJ that the benefits of the export-driven recovery are broadening and pushing up domestic demand, making it resilient to any future slowdown in overseas shipments, they said.
Japan’s economy grew in the first quarter at its fastest pace in a year on robust exports and a helpful boost from private consumption.
Still, core consumer prices rose just 0.3 percent in April from a year earlier, as companies remain wary of raising prices for fear of scaring away price-sensitive households.
Wage growth remains tame, dashing central bankers’ hopes that a tightening job market will lead to higher wages and give households more income to spend.
The yen’s recent rebound and stalling oil price rises also mean the boost to inflation from higher import costs could be smaller than initially expected, analysts say.
