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Economy

BOJ signals confidence in Japan's economy after standing pat

But Gov. Kuroda warns of downside risks in overseas economies amid trade war

BOJ Governor Haruhiko Kuroda speaks during a news conference at the BOJ headquarters in Tokyo on Dec. 20. (Photo by Karina Noka)

TOKYO -- The Bank of Japan kept its monetary policy unchanged on Thursday, maintaining that the nation's economic expansion remains intact despite increased market volatility and the trade war between the U.S. and China.

"The impact of the trade conflict on the Japanese economy has been limited so far," Gov. Haruhiko Kuroda said in a news conference Thursday after a two-day policy meeting. "While it is necessary to carefully monitor various risks in the economy, our view that the economy will continue to expand at a gradual pace."

Kuroda attributed the recent volatility in Japan and overseas to a growing risk aversion among investors because of the trade war. But he added that this hasn't affected economic fundamentals in any significant way, pointing to healthy corporate earnings and stable foreign exchange rates.

But Kuroda added that there are significant downside to growth in overseas economies. Even so, he noted that the 3.7% expansion is projected for the global economy in 2019 by the International Monetary Fund is the same as this year.

On the central bank's future policy steps, Kuroda said the BOJ could do more if needed.

"The BOJ will have many policy tools to deploy should additional easing becomes necessary," Kuroda said. He mentioned possible steps include cutting short-term interest rates, lowering the yield guide for long-term rates, expanding asset purchases and accelerating the pace of monetary base expansion.

The board voted 7-2 to maintain short-term interest rates at minus 0.1% and the target for the 10-year Japanese government bond yield at around zero. The central bank reiterated that it would allow the yields to fluctuate within a certain range.

The board also decided to continue the purchase of Japanese government bonds, increasing their holdings by around 80 trillion yen ($710 billion) a year, even as the actual pace of increase has slowed to about 40 trillion yen in the most recent 12-month period.

The central bank maintained a promise to keep both long- and short-term rates extremely low for an extended period of time to ensure that the economy can deal with a major tax increase scheduled for October next year.

The decision came as the U.S. Federal Reserve raised short-term interest rates for the fourth time this year on Wednesday, while the European Central Bank decided to stop expanding its balance sheet earlier this month.

The BOJ's own survey of corporate business sentiment has shown surprising resilience in the face of the U.S.-China trade war. The Tankan business sentiment survey earlier this month found that more managers believed business conditions were favorable than unfavorable, and that they saw a double-digit increase in capital spending in the financial year through March.

Since July, the BOJ has allowed greater flexibility in its yield targets and stock purchases, in a concession to market concern that the BOJ's rigid framework was stymieing market activity. The move raised expectations that the bank was getting ready to wind down its stimulus program.

But with trade tensions still brewing, economists are divided over the central bank's next policy move. Some expect the BOJ to gradually normalize its ultra-easy policy, while others expect it will stick with easing.

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