The Bank of Japan maintained its massive stimulus programme and offered a slightly more upbeat view of the world’s third-largest economy on Friday, citing a modest rebound in consumption and exports.

Adding to the more positive tone, a Reuters poll showed retailers’ mood turned positive in May and hit the highest level since June last year, when sales were reeling after a sales tax increase.

That added to some signs of hope from Wednesday’s data that showed Japan’s economy expanded at the fastest pace in a year in January-March due to modest increases in private consumption, which makes up roughly 60 per cent of GDP.

The central bank revised up its assessment on household spending and housing investment - two components hit most by last year’s sales tax hike - underscoring its conviction that the economy has emerged from the doldrums.

"Both for households and companies, a positive cycle is kicking in," where increases in income are leading to higher spending, BOJ governor Haruhiko Kuroda told reporters after the meeting.

Mr Kuroda acknowledged that the bank’s drive to banish deflation may be swayed by the steep fall in oil prices, but he told a news conference he remains confident of hitting its 2 per cent inflation target around the six months to March 2017.

In announcing its decision to keep policy steady, the BOJ said: “Private consumption is firm reflecting steady improvements in job and income conditions. Housing investment is bottoming out and showing signs of a pick-up.”

But some analysts were puzzled with the BOJ’s optimism given the modest pace of recovery.

"If you look at the data, the trend for the economy has not improved as much as the BOJ's upgrades would suggest, so I find this move a little hard to understand," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“We still expect the debate about additional easing to heat up again this autumn, because consumer prices are not likely to rise as fast as the BOJ expects.”

GLIMMER OF HOPE?

As widely expected, the BOJ maintained its pledge of increasing base money at an annual pace of 80 trillion yen ($662 billion) through aggressive asset purchases.

“Japan’s economy continues to recover moderately,” the central bank said, slightly revising up its view from last month when it said the economy was recovering moderately “as a trend.”

The Reuters Tankan, which closely tracks the BOJ’s quarterly tankan survey, showed on Friday that manufacturers are more upbeat about business and expect conditions to improve further.

An index measuring service-sector sentiment rose to the highest level since April last year.

Markets are focusing on what BOJ governor Haruhiko Kuroda will have to say in his post-meeting news conference about the GDP data, and how he may respond to growing criticism that the bank’s stimulus programme isn’t working much to boost inflation expectations.

The BOJ bought itself some breathing space last month when it pushed back the timing for hitting its inflation target. But the move also put its credibility on the line as it jarred with its commitment to achieve the price target in “roughly two years” since deploying the stimulus in April 2013.

Kuroda has voiced confidence the stimulus was succeeding in keeping the economy on track to hit the price target. But markets are unconvinced, with a majority of analysts in a Reuters poll betting on further easing in October.

Reuters