Japan's central bank maintained its monetary policy stance, including its commitment to controlling the yield curve, but upgraded its growth forecast as it expects the economy to continue to expand at a pace that is above its potential through fiscal 2018, which ends in April 2019.
The Bank of Japan (BOJ), which in September 2016 shifted the focus of its policy of quantitative easing toward "yield curve control" to reach its 2 percent inflation target, maintained its inflation forecast but cautioned that momentum toward the reaching the target is not "sufficiently firm, and thus developments in prices continue to warrant careful attention."
"Comparing the current projections with the previous ones, the projected growth rates are somewhat higher, mainly reflecting improvement in overseas economies and the yen's deprecation," the BOJ said.
The BOJ raised its forecast for Gross Domestic Product growth in the current fiscal year to an average of 1.4 percent from 1.0 percent forecast in October last year. For fiscal 2017 growth is expected to accelerate further to 1.5 percent from a previous 1.3 percent but then decelerate to 1.1 percent in fiscal 2018, up from 0.9 percent.
Japan's potential growth rate is estimated to be around 0.5 percent and in the third quarter of 2016 GDP expanded by an annual rate of 1.1 percent, up from 0.9 percent in the second quarter.
"With regard to the outlook, Japan's economy is likely to turn to a moderate expansion," the BOJ said, adding that domestic demand is rising due to the government's large-scale stimulus measures and its own highly accommodative policy.
Investments are likely to maintain the "moderate increasing trend," helped by higher growth expectations and spending in connection with the Olympic Games in 2020.
Growth in overseas economies is also expected to rise moderately as advanced economies continue to grow and a recovery in emerging economies gradually takes hold, supporting Japan's exports.
Helped by higher energy prices, the BOJ expects consumer price inflation to rise from around 0 percent and become slightly positive and then rise toward 2 percent as the output gap improves and inflation expectations rise.
"The timing of the year-on-year rate of change in the CPI reaching around 2 percent will likely be at the end of the projection period -- that is, around fiscal 2018," BOJ said.
Japan's inflation rate, all items less fresh food, is seen averaging minus 0.2 percent in the current fiscal year, which ends April 1, slightly lower than minus 0.1 percent seen in October.
For fiscal 2017 inflation is seen rising to 1.5 percent, the same as forecast in October, and then accelerate further to 1.7 percent, unchanged from October.
Japan's headline inflation rate eased to 0.3 percent in December from 0.5 percent in November while the core inflation rate fell by 0.2 percent, up from a fall of 0.4 percent in November.
Japan's yen began depreciating in October 2012 and hit a low of just below 125 to the U.S. dollar in June 2015. It then bounced back until August 2016 before again easing.
This year it has firmed slightly and was trading at 113.3 to the dollar today, up 3.3 percent since the start of this year.
The BOJ maintained its interest rate of minus 0.10 percent on banks' deposits that exceed reserve requirements and will continue purchasing government bonds around its current pace of around 80 trillion yen in order to keep 10-year yields around 0 percent.
In addition, the BOJ will purchase exchange-traded funds (ETFs) and real estate investment trusts so their outstanding amount rise by an annual pace of about 6 trillion yen and about 90 billion yen, respectively.
The BOJ will also continue purchasing commercial paper and corporate bonds at a pace of about 2.2 trillion and 3.2 trillion yen, respectively.