BOJ trims inflation forecast, signals prolonged easing as COVID pain persists

FILE PHOTO: A man wearing a protective mask walks past the headquarters of Bank of Japan amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020.REUTERS/Kim Kyung-Hoon

By Leika Kihara and Daniel Leussink

TOKYO (Reuters) -Japan’s central bank maintained its massive stimulus on Tuesday and projected inflation missing its 2% target for years to come, as fresh curbs to combat a spike in COVID-19 cases overshadow the boost to growth from solid global demand.

Japan last week declared a third, two-week state of emergency for Tokyo, Osaka and two other prefectures to contain the pandemic, clouding prospects for a fragile economic recovery.

In a quarterly report released after its two-day meeting on Tuesday, the Bank of Japan stuck to its view the world’s third-largest economy is headed for a moderate recovery as robust U.S. and Chinese demand underpins exports.

But the bank cut this year’s price forecast and predicted for the first time that inflation will stay well short of its 2% target beyond Governor Haruhiko Kuroda’s term, which ends in early 2023.

As widely expected, the BOJ maintained its short-term interest rate target at -0.1% and that for 10-year bond yields around 0%.

“Japan’s economy is likely to recover, though the level of activity will be lower than before the spread of the pandemic mainly for sectors that offer face-to-face services,” the BOJ said in the report.

“We will take additional monetary easing steps without hesitation as needed with a close eye on the impact of the pandemic,” it said.

Markets are focusing on Kuroda’s post-meeting briefing for his views on how the new state of emergency curbs could affect Japan’s economy and the price outlook.

The BOJ said it now expects core consumer inflation to hit 0.1% in the fiscal year beginning in April, down from a forecast of 0.5% made in January.

It projects inflation to accelerate to 0.8% the following year and 1.0% in fiscal 2023, the report showed.

The BOJ conducted a review of its policy tools in March to make them sustainable enough to weather an expected prolonged battle to fire up inflation. Japan’s core consumer prices fell for the eighth straight month in March.

(Reporting by Leika Kihara, Daniel Leussink and Tetsushi Kajimoto; Editing by Sam Holmes)