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The Bank of Japan kept monetary policy on hold at its April meeting, but has upgraded its growth outlook and kept inflation forecasts relatively unchanged.

The BoJ kept its policy rate steady at minus 0.1 per cent and stuck to its pledge to keep 10-year bond yields around zero, as expected by economists.

But the central bank took a more upbeat tone in this month’s Outlook for Economic Activity and Prices.

The BoJ now expects real gross domestic product to grow by 1.6 per cent in the 2017 fiscal year, up from the 1.5 per cent forecast made in January. Policymakers think Japan’s economy is likely to continue growing at a pace above its potential, mainly through fiscal year 2018, when GDP is expected to grow by 1.3 per cent, two-tenths of a percentage point better than the January estimate.

On the inflation front, the BoJ remains hopeful that prices are “likely to continue on an uptrend and increase toward 2 per cent, mainly on the back of an improvement in the output gap and a rise in medium- to long-term inflation expectations.”

Japan’s consumer price index (excluding fresh food) is expected to rise 1.4 per cent in the 2017 fiscal year – the 12 months ending March 31, 2018 – which is a slight downgrade from the 1.5 per cent forecast made in January. The following year, prices are expected to be up by 1.7 per cent, unchanged from forecasts earlier this year.

The yen was 0.1 per cent weaker at ¥111.13 per dollar, trimming declines a touch following the release of the BoJ statements. The currency had been as much as 0.3 per cent weaker before the policy announcement.

The Federal Reserve has raised interest rates three times within the past 18 months, but other major central banks have been, in general, slow to normalise their policy settings from their financial crisis (or after) levels.

The BoJ is likely some way from lifting rates, but economists expect it to first raise its 10-year bond yield target before starting to play with its main policy setting tool.

The BoJ has adopted a more optimistic outlook this year, and its January outlook saw an upgrade to GDP forecasts from the October report, when growth of 1.3 per cent in fiscal year 2017 was tipped. Inflation forecasts were left unchanged in January, but the minutes from that meeting showed a slight improvement in optimism toward hitting its 2 per cent target within the hoped-for period.

Copyright The Financial Times Limited 2017. All rights reserved.
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