TOKYO -- The relatively upbeat tone that Japan's central bank kept on the domestic economy on Friday was likely intended to quell hopes of additional easing given its limited room to maneuver.
The Bank of Japan maintained its diagnosis that the economy is "expanding moderately," leaving in place key measures such as guiding long-term interest rates to around zero, while at the same time citing sluggishness in exports and industrial production linked to slowdowns in China and Europe.
Central bank officials have hinted that if the economy continues to lose steam, the bank may need to move quickly to loosen its policy further. But concerns over the side effects of long-term easing, such as crimping banks' income, prompted the BOJ to put on a bullish front.
Gov. Haruhiko Kuroda noted negative factors, saying "slowdowns in overseas economies are taking a toll on exports and production." The bank pointed to "some weakness recently" in those categories, down from January's view that both were "on an increasing trend."
China's deceleration is taking a toll on Japan's exports as well as production in fields like semiconductors. Japan's real exports for January fell 5.3% from the previous month, the BOJ said, while the Ministry of Economy, Trade and Industry's industrial production index declined from the preceding month for a third straight month in January.
A coincident index of business conditions tracked by Japan's Cabinet Office likewise dropped for a third straight month in January, and the basic assessment of the economy -- which is decided automatically -- suggested that the economy may be in retreat.
Nevertheless, Kuroda said there was "no change to our main scenario, in which income and spending remain in a virtuous cycle." He added that "capital spending is healthy, and consumption remains steady" despite some ups and downs.
The governor expects conditions abroad to improve in the year's second half, with European auto sales likely to rebound after a slowdown stemming from environmental regulations, and exports to China expected to recover. The Chinese economy will not keep slowing, Kuroda said, citing broad stimulus efforts already being implemented by Beijing.
This measured optimism is shared by many private-sector economists, encouraged by Beijing's declaration at the National People's Congress legislative session ended Friday that it aims to slash taxes and social security fees by 2 trillion yuan ($298 billion).
China's "efforts to stimulate domestic demand will be able to stave off a rapid deceleration," said Shinichi Seki of the Japan Research Institute.
Some caution, however, that the impact of Beijing's plans will be limited given that China still suffers from structural issues such as heavy debt loads at businesses and municipalities.
If Japan's economy continues to slow, the BOJ "could be pressed into additional easing as early as April," suggested one analyst at SBI Securities.
The bank itself appears to be bracing for that. It was noted at a January policy meeting that "if downside risks to economic activity and prices materialize, the bank should be prepared to make policy responses."
Reflationist policy board member Yutaka Harada also said in a March 6 speech that if certain risks were to materialize, it would be "necessary to implement additional monetary easing without delay."
Should the economy worsen, the bank will face a difficult needle to thread in deciding when to loosen policy further while minimizing the negative impact.