Pedestrians cross a road outside the Bank of Japan (BOJ) headquarters in Tokyo, Japan, on Monday, March 11, 2019. Image Credit: Bloomberg

TOKYO: The Bank of Japan kept monetary policy steady on Friday but tempered its optimism that robust exports and factory output will underpin growth, a nod to heightened overseas risks that threaten to derail a fragile economic recovery.

Factories across the globe slammed on the brakes last month as demand was hit by the US-China trade war, slowing global growth and political uncertainty in Europe ahead of Britain’s departure from the European Union.

In a nod to the increased risks, the BoJ cut its assessment on overseas economies to say they are showing signs of slowdown.

It also revised down its view on exports and output.

“Exports have shown some weaknesses recently,” the central bank said in a statement on its policy decision, offering a bleaker view than in January when it said they were increasing as a trend.

At a two-day rate review ending on Friday, the BoJ maintained a pledge to guide short-term interest rates at minus 0.1 per cent and 10-year government bond yields around zero per cent. The widely expected decision was made by a 7-2 vote.

The central bank also stuck to its view Japan’s economy is expanding moderately, but added a phrase that “exports and output have been affected by slowing overseas growth.” In January, it said only that the economy was expanding moderately.

Many in the BoJ expect Japan’s economy to emerge from the current soft patch in the second half of this year, when Beijing’s stimulus plans could lift Chinese demand and underpin global growth, sources have told Reuters.

But there is uncertainty on how quickly global demand could rebound, adding to woes for Japanese companies already feeling the pinch from slowing Chinese demand, analysts say.

Push back on 2% target

The BoJ faces a dilemma. Years of heavy money printing have dried up market liquidity and hurt commercial banks’ profits, stoking concern over the rising risks of prolonged easing.

And yet, subdued inflation has left the BoJ well behind other major central banks in dialling back crisis-mode policies, leaving it with little ammunition to battle the next recession.

While BoJ Governor Haruhiko Kuroda insists that hitting 2 per cent inflation remains a top priority, politicians and economists are increasingly expressing doubts about the target as the strains from years of ultra-low rates accumulate.

About two-thirds of economists recently polled by Reuters believed the optimal target for Japan’s consumer inflation was around 1 per cent.

Finance Minister Taro Aso said on Friday “things could go wrong” if the BoJ insisted too much on achieving 2 per cent inflation. “No one in the public would be angry even if the inflation target isn’t achieved,” he told reporters.

Markets are on the lookout for Kuroda’s response when he holds a news conference at 3:30pm (0630 GMT).

The biggest worry among BoJ policymakers is that weakening exports and output will hurt corporate sentiment, prompting firms to delay capital expenditure and wage hikes.

Big Japanese firms offered smaller pay increases at annual wage talks on Wednesday as the economy sputters, tempering hopes that domestic consumption will offset external risks to growth.