Updated: 04/30/2014 15:18 | By Agence France-Presse

BoJ cuts economic growth forecast, keeps inflation target

Bank of Japan (BoJ) policymakers on Wednesday lowered their growth expectations for the economy, as tepid data and a sales tax rise have fuelled fears about the strength of the nation's recovery.

BoJ cuts economic growth forecast, keeps inflation target

A woman shops at the Itoyokado supermarket in Tokyo on April 1, 2014, the day a sales tax rise came into effect - by Yoshikazu Tsuno

The downgrade was detailed in the central bank's semi-annual outlook, issued after board members ended a meeting at which they held fire on expanding a massive stimulus drive launched a year ago.

BoJ policymakers expect the world's number three economy to expand by 1.1 percent in the fiscal year to next March, down from an earlier 1.4 percent forecast, according to the report which gauges the median of members' views.

However, their view that inflation would come in at 1.3 percent over the same time period was unchanged from a previous forecast.

The report was seen as a key measure of whether the BoJ still thinks it can reach a 2.0 percent inflation rate target by next year.

BoJ Governor Haruhiko Kuroda has stuck to the ambitious timeline despite growing doubts among many observers, who said the BoJ would be forced further to expand its monetary easing to counter a downturn in the economy.

"While the Bank of Japan left policy settings unchanged today, we still think more easing will be announced in the second half of the year," said Marcel Thieliant, an economist at London-based Capital Economics.

The BoJ's inflation target -- and the massive easing campaign launched last year -- is a cornerstone of Prime Minister Shinzo Abe's wider bid to drag the country out of years of deflation and slumbering growth.

After the BoJ's last meeting on April 8, Kuroda -- the former head of the Asian Development Bank, hand-picked by Abe to help steer his growth bid -- said the economy was pushing ahead despite fears that the April 1 tax rise would dampen consumer spending.

However, fresh data earlier Wednesday showed Japan's factory output rose a weaker than expected 0.3 percent in March, and producers pointed to weakness over the coming months.

- 'Worsening outlook' -

The figures came after a 2.3 percent month-on-month fall in February industrial production, highlighting an uneven recovery in Japan's economy.

"The manufacturing PMI (purchasing managers' index) suggests that output will fall sharply following the consumption tax hike," Capital Economics said, adding that "the manufacturing sector had already lost momentum well before the sales tax hike kicked in".

Producers were also less confident, with a survey accompanying the data showing they expected factory output to shrink 1.4 percent in April and inch up just 0.1 percent in May.

However, over the January-March quarter, Japan's factory output grew by 2.8 percent, offering hope that overall economic growth will beat an "anaemic" reading in the last quarter of 2013, analysts said.

Japanese GDP growth "likely accelerated in the first quarter after the anaemic 0.2 percent quarter-on-quarter gain in the fourth quarter, especially since private consumption should be particularly buoyant", Capital Economics said.

"But the outlook has worsened."

Analysts said firms adjusted their inventories well ahead of the tax rise to help cushion its impact.

Retail sales got a strong boost ahead of the increase -- Japan's first in 17 years -- as shoppers made a last-minute dash to buy staples and big-ticket items such as cars and refrigerators.

The last tax increase in 1997 was followed by years of deflation and tepid economic growth.

But "if we compare the current situation with the previous tax hike in 1997, companies are coping with the policy change better so manufacturing output and the economic trend should improve," Yuki Endo, an economist at Hamagin Research Institute, told Dow Jones Newswires.

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