October 30, 2015 10:19 am

The Bank of Japan has kept monetary policy on hold even as it slashed its economic forecasts and said it did not expect to hit its 2 per cent inflation target until the start of 2017.

The central bank cut its inflation forecast for the current fiscal year from 0.7 to 0.1 per cent and its growth outlook by 0.5 percentage points to 1.2 per cent.

Its decision to keep buying government bonds at a pace of Y80tn a year, despite sluggish consumption and a slowdown in China, is a bet that there is enough economic momentum to sustain the credibility of its inflation goal.

“We have delayed the timing for reaching our price target but this is mainly due to falling oil prices,” saidHaruhiko Kuroda, BoJ governor, at a press conference. The basic trend of prices is steadily improving.”

Mr Kuroda sent no particular signal that more easing lay ahead but rejected any suggestion the BoJ was out of ammunition. “I don’t think there is any limit to our policy options,” he said.

Markets responded with equanimity. The yen traded up slightly at Y120.5 to the dollar, in a range it has held for several months, while the Topix share index was up 11 points at 1,558.

Data released on Friday offered a modest boost to the central bank, showing its preferred core inflation index strengthening to a year-on-year rise of 1.2 per cent in September, but a renewed slide in household consumption.

Mr Kuroda has argued strongly that Japanese companies have changed their pricing behaviour towards inflation and a virtuous cycle is taking hold between wages and spending.

But the weakness of real consumption, down 0.4 per cent in September compared with a year earlier, shows how yen-induced price rises combined with sluggish wage growth have held shoppers back.

Yasunari Ueno, chief market economist at Mizuho Securities, said the decision to hold policy “threatens a loss of credibility among overseas investors about the bank’s conduct of policy and exposes it to doubts that the 2 per cent inflation target is now just empty words”.

“Despite the regime change instigated by Mr Kuroda, the bank may now fairly be criticised for the same failings that dogged his predecessor, Masaaki Shirakawa,” said Mr Ueno.

Mr Kuroda dismissed the notion that his stimulus, launched two and a half years ago to break Japan out of decades of deflation, was losing credibility.

Economists had been split down the middle on whether the BoJ would act on Friday, although data over the past week made it easier to wait. A pick-up in industrial production means Japan is less likely to fall into a technical recession.

The BoJ also got a boost from the US Federal Reserve’s policy statement this week, which raised the odds of a US rate rise in December, and led to strength in the dollar.

Japan’s unemployment rate held steady at 3.4 per cent while the ratio of jobs to applicants rose slightly to 1.24 times, suggesting continued tightness in the labour market but a slowdown in the pace of improvement.

The BoJ board voted by a majority of eight to one. Takahide Kiuchi, a longstanding hawk, dissented, preferring to shrink the size of the purchase programme.