Bank of Japan governor Haruhiko Kuroda speaks during a press conference at the bank’s headquarters in Tokyo, Japan, on January 23 2019. Picture: JIJI PRESS/AFP/Japan OUT
Bank of Japan governor Haruhiko Kuroda speaks during a press conference at the bank’s headquarters in Tokyo, Japan, on January 23 2019. Picture: JIJI PRESS/AFP/Japan OUT

Tokyo — The Bank of Japan cut its inflation forecasts on Wednesday but maintained its massive stimulus programme, with governor Haruhiko Kuroda warning of growing risks to the economy from trade protectionism and faltering global demand.

Rising pressure from the trade war between China and the US — Japan's biggest trading partners — is adding to strain on the world's third-largest economy and undermining years of efforts by policy makers to foster durable growth.

Data earlier in the day showed Japan's exports in December fell the most in two years.

"To be honest, if US-China trade tensions are drawn out, there will be a serious risk to the global economy — first to the two countries’ own economies," Kuroda told a news conference after the end of the two-day policy review.

"For now, that possibility is slim, and I hope they will resolve this soon."

As expected, the BOJ trimmed its inflation forecasts, reinforcing views that it will have to stick with its unprecedented economic support for some time to come.

But despite rising risks such as trade disputes and Brexit, the central bank also maintained its view that Japan's economy will continue to expand at a modest pace.

Kuroda struck an optimistic tone, saying the economy would likely continue expanding through fiscal 2020.

However, a recent Reuters poll of economists showed external factors have increased the chances of Japan sliding into a recession in the fiscal year starting in April, making it even harder for the BOJ to reach its elusive 2% inflation target.

China on Monday reported its slowest growth in nearly three decades and it is expected to lose more steam in coming months. The International Monetary Fund (IMF) trimmed its global growth forecasts and a survey showed increasing pessimism among business chiefs amid the trade tensions.

"Such downside risks concerning overseas economies are likely to be heightening recently, and it also is necessary to pay close attention to their impact on firms' and households' sentiment in Japan," the BOJ said in a quarterly outlook report released along with the policy decision.

The BOJ reiterated a pledge to continue buying Japanese government bonds and left its short-term interest rate target unchanged at -0.1%. It also said it would keep guiding 10-year government bond yields about 0%.

"It will be difficult for the BOJ to discuss policy normalization or an exit strategy for the moment as risks from global economies are rising," said Hiroaki Mutou, chief economist at Tokai Tokyo Research Institute.

"The central bank will likely save easing measures for later and it will examine how the Fed policy movement will be and how it will likely impact the yen," he said.

Concerns about a global slowdown and volatile financial markets have prompted the US Federal Reserve to take a more cautious stance on future interest rate increases after four hikes in 2018, weighing on the dollar.

Reuters