The Bank of Japan kept monetary policy steady on Friday in a sign that a first-quarter economic slump failed to undermine the central bank's confidence growth will pick up around autumn when the wounds from the devastating earthquake begin to heal.
In a surprise move, Deputy Governor Kiyohiko Nishimura did not repeat his proposal to loosen policy further. He suggested expanding the central bank's asset buying scheme last month but was outvoted by the remaining eight board members.
That has led some analysts to scale back expectations of a near-term monetary easing, despite a surprisingly deep 0.9 percent drop in economic output that knocked the world's third-largest economy into its second recession in three years.
I think the BOJ is going to be on hold for some time. Maybe Nishimura has come to the conclusion that he has no support. For the sake of unity within the bank, that could be a good thing, said Adrian Foster, head of financial markets research for Asia-Pacific of Rabobank International in Hong Kong.
I don't see a lot of substantive steps the BOJ could take, because with asset purchases you're talking about bringing the yield curve 4 to 5 basis points lower, which is marginal.
The central bank acknowledged that the economy was still suffering after the triple blow of the March 11 magnitude 9.0 earthquake, a deadly tsunami and a nuclear crisis at a crippled power plant.
But Governor Masaaki Shirakawa also said overseas economic growth remained strong while Japanese companies were making steady progress in restoring output and power shortages in the summer would be less disruptive than initially feared.
We're seeing some very encouraging signs, Shirakawa told a news conference. Supply constraints will ease as a whole from the autumn onward.
Still, Shirakawa said the BOJ would continue to focus on risks to growth, signaling the bank's readiness to ease policy further if the damage from the disaster proved bigger than expected.
As widely expected, the BOJ kept interest rates unchanged at a range of zero to 0.1 percent by a unanimous vote and maintained the 10 trillion yen limit ($122 billion) for its asset buying scheme, which now serves as its main policy tool.
While some automakers have said they will reach full production sooner than expected, the pain from the quake was still evident.
Tokyo Electric Power Co <9501.T> reported record losses to account for the disaster at its Fukushima nuclear power plant and said it would be tough to sell bonds this year, a sign the fate of the utility will be a source of uncertainty for markets.
Electronics giant Panasonic Corp <6752.T> said the current financial year would be extremely tough and factories in the tsunami-ravaged northeast were not all operating at full capacity.
Yet the BOJ sees the current downturn as an anticipated and temporary rough patch, a view shared by Economics Minister Kaoru Yosano, and sets its sights on prospects for a recovery late this year.
That means that the BOJ will use its limited policy options only if a sudden market shock or prolonged disruptions to output hurt sentiment and spending.
Asked why his deputy did not renew his call for policy easing, Shirakawa only said that Nishimura shared the views on the economic outlook and risks agreed at the board this week.
The BOJ has repeatedly argued that while monetary policy can mitigate a slump in sentiment, there is little it can do about problems now plaguing the economy such as power shortage fears and supply chain disruptions.
On the other hand, it is expected to maintain its ultra-loose policy bias for at least another year even as other central banks, such as the Federal Reserve and the European Central Bank, start to roll back huge stimulus activated after the collapse of Lehman Brothers late in 2008.
The central bank last eased policy days after the quake, doubling its asset-buying scheme. So far it has spent nearly 4 trillion yen on those purchases.
The BOJ probably needs to go through more data for April and May to decide if it needs to revise its view on the economy, said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo, who sees a chance that the BOJ may expand the scheme around August.
Shirakawa said the BOJ would also examine ways of supporting reconstruction efforts, taking into account the financing needs of the quake-hit areas, although he did not elaborate on what kind of measures he had in mind.
($1 = 81.775 Japanese Yen)
(Additional reporting by Rie Ishiguro, Kaori Kaneko, Stanley White and Antoni Slodkowski; Editing by Tomasz Janowski)