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Bank of Japan cuts economic growth inflation outlook

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The Bank of Japan on Thursday cut its annual growth and inflation forecasts, as a slate of tepid data highlight weakness in the world’s number three economy, while analysts expect further monetary easing later in the year.

Gross domestic product will expand 2.0 percent in the year to March 2016, while the inflation rate is seen at 0.8 percent, the BoJ said in a semi-annual report. That compares with a previous estimate of 2.1 percent and 1.0 percent respectively.

The revision to the fiscal year forecast came after the central bank wrapped up a policy meeting Thursday where it held off fresh easing measures, despite flatlining inflation that is defying a two-year-old stimulus programme.

In a widely expected decision, the BoJ stood pat on its record asset-purchase programme, which is adding about 80 trillion yen ($672 billion) to the money supply every year in a bid to jack up prices and kickstart growth.

One BoJ board member lost his call to shrink the stimulus programme by nearly half, with his eight colleagues voting to stay the course.

The yen got a boost, with the dollar slipping to 118.73 yen from 118.85 yen before decision, The pickup in the yen, bad news for Japanese exporters, helped send Tokyo’s benchmark Nikkei stock index tumbling 2.69 percent Thursday.

Earlier in the morning official figures showed factory output fell by a less-than-expected 0.3 percent in March — tepid figures that highlight an anaemic recovery.

BoJ Governor Haruhiko Kuroda, who holds a press briefing Thursday afternoon, has previously acknowledged that dragging Japan out of years of deflation was proving to be “very challenging”, and he warned that inflation may temporarily fall to zero

– More stimulus –

Economists have said the BoJ will ramp up its easing programme, likely later this year, to bring Japan closer to its two-percent inflation target, which is a cornerstone of Prime Minister Shinzo Abe’s drive to conquer stagnant or falling prices and revive the economy.

“The Bank obviously considers the slowdown in inflation since the autumn to be a temporary phenomenon, blaming it mostly on the plunge in energy prices. In our view there is more to it than that,” Marcel Thieliant at Capital Economics said in a commentary after the decision.

“The economic recovery is stalling, wages are barely rising, and inflation excluding food and energy is near zero, too. What’s more, it is far from clear that quantitative and qualitative easing has lifted inflation expectations among households and firms.”

He added that fresh loosening of policy was on its way, a widely held view among economists.

In October, the bank shocked markets when it inflated its asset-buying stimulus plan by as much as 20 trillion yen annually, bringing it to the current level.

“We… remain convinced that more monetary easing will be needed before too long,” Thieliant said, pointing to July or October as likely timelines.

The BoJ report appeared to push back an already murky timeline for hitting the inflation target to the first half of fiscal 2016 — which runs from April through September next year.

The ambitious goal was originally supposed to have been achieved around two years after the launch of the BoJ’s stimulus in April 2013.

But the bank has, over time, loosened that timeline as the data suggested it was unattainable.

“Although the timing of reaching around 2.0 percent (inflation) depends on developments in crude oil prices, it is projected to be around the first half of fiscal 2016 , assuming that crude oil prices will rise moderately from the recent level,” the report said.

“Thereafter, Japan’s economy is expected to gradually shift to a growth path that sustains such inflation in a stable manner.”

Deflation may sound good for Japanese consumers, but it means people tend to put off buying because they do not expect prices to rise and hope they might even get goods cheaper down the line.

That, in turn, hurts producers and holds back their expansion and hiring plans, which is bad news for the economy.

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