TOKYO The Bank of Japan held off on further policy easing on Thursday despite slowing global growth that has driven other major central banks into expanding stimulus, convinced that robust domestic demand will keep the country's economic recovery on track.
The central bank fine-tuned its 70 trillion yen asset-buying and lending programme without changing the total size. It reshuffled its composition to buy more short-term securities and reduced the amount offered in fixed-rate market operations.
The steps were seen as largely technical moves as the BOJ has already been struggling to feed markets more cash due to weak demand, a dilemma facing many central banks worldwide as they seek new ways to shore up growth.
But the yen briefly weakened and 10-year government bond futures hit a nine-year high as markets initially took it as a shift in policy.
"The BOJ was widely expected not to do anything at all, and when they did something, there was an initial reaction to it, but the move was short-lived as the forex market assessed the net effect of the bank's technical changes," said Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo.
The BOJ's decision to stand pat on monetary policy came hours after the Bank of Korea joined the global rush to ease monetary policy, cutting its benchmark rate for the first time in more than three years to fend off the effects of the global slowdown.
Some market players had expected the BOJ to follow up on last week's stimulus measures by the central banks of the euro zone, Britain and China with its own monetary expansion in a coordinated move to buffer the global economy from the corrosive impact of Europe's debt crisis.
But with no clear signs that Japan's recovery prospects are under threat and the yen off record highs, the central bank likely saw little need to tap its depleted arsenal now.
"Japan's economy is gradually starting to pick up on firm domestic demand," the central bank said in a statement announcing the policy decision, maintaining its assessment from last month.
The BOJ kept its policy rate at a range of zero to 0.1 percent, and held off on a further increase in its asset buying and lending programme.
The BOJ slightly cut its consumer price forecast for this fiscal year to reflect recent declines in commodities markets, but projected inflation would pick up the following year and head for its target of 1 percent.
While the BOJ is also worried about the global slowdown, its officials have stressed that any further easing will come only if risks to Japan's economy heighten enough to force the central bank to abandon its forecast of a moderate recovery.
For now, the BOJ expects robust private consumption and reconstruction spending after last year's earthquake to keep the Japanese economy on track to outperform most of its G7 peers with growth of around 2 percent.
In a quarterly review of its forecast, the BOJ said it now expects the economy to expand 2.2 percent in the year to March 2013 and 1.7 percent the following year. That compared with the projection three months ago of 2.3 percent growth in the current business year and 1.7 percent the following year.
Lower commodity prices prompted the BOJ to cut its core consumer inflation forecast to 0.2 percent for the current fiscal year from 0.3 percent.
But it stuck to its forecast of 0.7 percent inflation in the following year, in a sign it is maintaining the view that Japan will make steady progress toward a sustained end to deflation.
The BOJ set the 1 percent inflation target and eased policy in February, and followed up with additional stimulus in April, to show its determination to reinflate an economy beset with more than a decade of grinding deflation.
It has stood pat since then and, already struggling to force-feed money to markets awash with cash, is reluctant to boost its asset buying and lending programme too hastily. = 79.6600 Japanese yen)
(Additional reporting by Stanley White, Kaori Kaneko and Tetsushi Kajimoto; Editing by Kim Coghill)