Jan 21, 5:18 AM EST

Japan central bank sees growth rebounding from contraction in coming year, raises forecast

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TOKYO (AP) -- Japan's central bank said Wednesday it expects the world's third largest economy to rebound in the coming fiscal year after contracting 0.5 percent this fiscal year, in an upbeat assessment that scuttled hopes for fresh stimulus.

The Bank of Japan ended a policy meeting without any major change to its ultra-loose monetary policy. Its massive asset purchases are injecting trillions of yen (billions of dollars) into Japan's economy each month to overcome deflation and economic stagnation.

"The bank's sanguine views suggest that the chances of near-term easing have diminished somewhat," Marcel Thieliant of Capital Economics said in a commentary.

The central bank's decision to stand pat comes as the European Central Bank weighs whether or not to launch major stimulus measures of its own to ward off crippling deflation.

Japan's economy is in recession after a sales tax hike in April 2014 stifled demand. But the BOJ's statement said it was still on track for a moderate recovery.

The International Monetary Fund pointed to weakness in Europe and Japan, and the absence of a rebound in corporate investment in the advanced economies, as major concerns in an update of its economic outlook issued Tuesday.

"As for risks, the most obvious ones involve stagnation in the eurozone, or Japan or both," Olivier Blanchard, the IMF economic counsellor and director of research, said in a webcast.

"Sustained growth in Japan requires sustained demand and higher potential growth in the medium run, but at this stage potential growth is very, very low," he said.

Still, the BOJ said in a policy statement that it believes housing investment and manufacturing have "bottomed out."

Despite lower energy prices thanks to the drop in crude oil import costs in recent months, "inflation expectations" remain intact, Bank of Japan Gov. Haruhiko Kuroda told reporters. That will stimulate more economic activity, helping to push prices higher over time, he said.

The BOJ estimates the economy will contract 0.5 percent in the April 2014-March 2015 fiscal year. It previously forecast 0.5 percent growth. The bank cut its inflation forecast, excluding the tax hike, to 0.9 percent from 1.7 percent. It is targeting 2 percent inflation as part of its monetary stimulus goals.

The bank raised its growth forecast for the upcoming fiscal year to 2.1 percent from 1.5 percent.

Both the BOJ and the government are exhorting Japanese corporations, many of which are reaping record profits thanks to a weak yen and cheap credit, to boost wages. Such increases are needed to sustain growth by improving the purchasing power of Japanese households whose overall incomes have continued to fall.

"The upshot is that the chances of hitting the inflation target are slim without additional monetary stimulus," Thieliant said.

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