Japan's central bank maintained its ultra-loose monetary policy Friday to support the economy while forecasting there could be a slight rise in inflation next year, although that would not necessarily mean a change in its stance on interest rates.
In its semi-annual Outlook for Economic Activity and Prices, the Bank of Japan said core consumer inflation, the key barometer for policy-setting, should "increase slightly" in the year to March 2006, heralding an end to years of debilitating deflation.
At the same time, however, it cautioned that uncertainties such as oil prices and labour productivity could change that projection.
"Under the current Outlook, it is not certain whether or not the occasion will arise during fiscal 2005 to change the present monetary policy framework," it said.
The bank currently injects funds as required into the financial system instead of lowering key short-term rates that are already near zero percent. In this way it aims to provide all the liquidity and more that might be needed while keeping interest rates low in an effort to keep the economy going.
The report came out after the central bank's nine-member policy board voted unanimously to leave monetary policy unchanged, as was widely expected.
"The prospect of a possible rise in the Consumer Price Index in fiscal 2005 does not (alone) meet the conditions for changing the current monetary stance," Bank of Japan Governor Toshihiko Fukui told a news conference later.
Fukui has pledged to maintain the central bank's super-loose credit policy until the year-on-year change in the nation-wide core consumer price index stays at or above zero.
Data earlier showed that the central bank's forecast for next year could be on target, with the figures showing fresh signs that deflation might finally be easing, albeit via un unwanted spike in gasoline and vegetable prices.
Core consumer prices in Japan, which exclude volatile fresh food but do include energy costs, were flat in September compared with a year earlier, the first time they did not fall in seven months.
Core consumer prices in metropolitan Tokyo, a leading indicator of nation-wide trends, fell 0.3 percent year-on-year in October but were unchanged from September.
"In fiscal 2005, CPI is expected to increase slightly on a year-on-year basis, reflecting continued improvement in the output gap (the balance between overall supply and demand)," the central bank said in the report.
"It should be noted that the forecasts for prices are subject to some uncertainty as future developments in prices may be influenced by changes in various factors, such as crude oil prices, productivity and labour costs."
For the current year to March 2005, the policy board expects a continued slight decline in core consumer prices but next year, the nine members gave a forecast range for a fall of 0.1 percent to a rise of 0.2 percent.
The board expects Japan's gross domestic product (GDP) to grow 2.2-2.6 percent in real or inflation-adjusted terms for fiscal 2005, marking a slowdown from the 3.4-3.7 percent it forecasts for the current year.
"As exports and production continue to be on an uptrend, albeit at a slightly slower pace, corporate profits are increasing and this has led to an increase in business fixed investment," the bank said.
"Household consumption continues to hold up well reflecting the improvement in the employment situation and consumer sentiment." The bank remained optimistic about growth prospects.
"Looking forward, Japan's economy is expected to continue recovering and gradually move to a sustainable growth path," it said.