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Why the Bank of Japan is right to stay 'passive'

The Bank of Japan has signaled the beginnings of laxer monetary policy, perhaps indicating greater confidence in the outlook of the economy.

Bank of japan premierEnlarge
Governor Haruhiko Kuroda speaks to the press at the BOJ headquarters in Tokyo on August 8, 2013 after a two-day policy meeting (YOSHIKAZU TSUNO/AFP/Getty Images)

By refraining from adding further to its unprecedented monetary stimulus, the Bank of Japan (BOJ) has signaled increasing confidence in the nation's economic recovery, analysts told CNBC.

As widely expected, the central bank on Thursday kept its level of monthly purchases steady and its assessment of the economy unchanged at the conclusion of a two-day meeting.

While the decision triggered some chatter in the market that the BOJ is becoming "passive" and should be doing more, the broad agreement among market watchers is that the central bank has provided enough monetary stimulus for now, and is sending a message that the recovery is on track.

"Today's statement means the BOJ is feeling more comfortable [with the economic outlook]," said Masayuki Kichikawa, chief Japan economist at Merrill Lynch Japan Securities.

"There are no downside risks emerging - inflation has developed with expectations while long-term interest rates have been very stable so the BOJ has been successful in restoring its credibility," he added.

The last time the bank took action was in April, when it unveiled the world's most aggressive quantitative easing program, pledging to pump $1.4 trillion into the Japanese economy over the next two years. It has since abstained from injecting further stimulus.

Jesper Koll, head of Japanese equity research at JPMorgan Securities, said that by holding fire, the BOJ was giving markets exactly what they needed, which is consistency.

"What Japan needs most is consistency of policy; the past decade was all about 'stop-go, stop-go.' the new leadership of the BOJ is putting an end to this," Koll said. "Credible targets have been set, and the delivery has been flawless, with the balance sheet expanding exactly as promised; and long-term interest rates anchored and stable."

Currency headwinds

A strengthening yen in recent sessions has rattled market sentiment, raising some hopes that the BOJ might unveil measures to temper the gains, which could hamper the country's economy by dampening its key export sector.

"I have been disappointed about the way the BOJ's monetary policy has become so passive, said Takuji Okubo, principal and chief economist at Japan Macro Advisors on CNBC Asia's Cash Flow. "That has let the yen go higher."

But Merrill Lynch's Kichikawa disagreed with the view. While the yen traded near a seven-week high of 96.1 against the dollar on Thursday, yen-dollar is still down 11 percent so far this year.

Still, he noted that a dramatic spike in the yen could trigger policy action. "If the yen hits 90,that could lead to a downwards revision and the BOJ could become more nervous," Kichikawa said.

On the whole,experts agree that the central bank has done its job and now it's up to the government to stimulate the economy with fiscal measures.

"I certainly think that the Japanese government has a part to play in implementing the structural reforms that Mr.Abe promised this year. Markets are quite prepared to give Japanese authorities the benefit of the doubt but now we need reform measures to stimulate the economy," noted Michael Hewson, senior market analyst at CMC Markets.

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Original Source URL: 
http://www.cnbc.com/id/100947558

http://www.globalpost.com/dispatch/news/regions/asia-pacific/japan/130808/why-the-bank-japan-right-stay-passive