The Bank of Japan kept monetary policy unchanged on Thursday as two hawkish board members failed to win support for proposals to reduce the supply of funds that the central bank pumps into the financial system.
But the central bank upgraded its view of the economy for the third straight month, as it became more confident that the information technology sector had finished paring excess inventories that had long held back production.
In a widely expected decision, the BoJ said it would keep its target for banks' current account deposits held at the central bank at 30-35 trillion yen ($273-318 billion), around five to six times legally required reserves.
The BoJ has been struggling to get banks to stock up on extra funds as the health of the financial system improves. Most board members are wary of cutting the funds target, however, because it could look like a shift to credit tightening at a time when the economy has yet to overcome deflation.
In the monthly report, the central bank also upgraded its view on consumer prices, saying they were expected to flatten or rise slightly around the year-end. In August it had said consumer prices would keep falling moderately for the time being.
Naomi Hasegawa, senior fixed-income strategist at Mitsubishi Securities, said the BoJ's economic assessment was more upbeat than she had expected. She added, though, that the bank was probably taking cautious steps to prepare the market for a policy shift, which she said could take place around early to mid-2006. "But there are risks that higher oil prices will have an adverse impact on the economy. I hope the BoJ is not going too far," she said.
The BoJ has promised not to end its policy of flooding the financial system with cash until year-on-year consumer price rises stabilise, and BoJ officials are wary of making any changes to the funds target before that condition is met.
The vote was again 7-2, meaning the hawks' campaign since April for a lower target had once more failed to gain momentum.
The BoJ instead said it would allow temporary breaches of its target when fund demand is weak, a measure in place since May.
It unveiled plans to amend the way it calculates prices for collateral used in money market operations, a measure aimed at facilitating the operations. The central bank also said it may allow some of its money market operations to be processed electronically from mid-2006.
Earlier, BoJ data showed Japanese bank lending neared a turnaround from years of contraction in August but money supply growth remained sluggish, reinforcing the view that an end to the central bank's ultra-easy monetary policy was on radar screens but would not happen imminently.
Outstanding loans held by Japan's four main categories of banks fell 1.9 percent from a year earlier. They have been down every month since comparable data started in January 2001, but the latest figure was the smallest decline during that period.
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