The Bank of Japan kept monetary policy settings steady on Thursday and projected inflation to stay below its 2 percent target for at least two more years, reinforcing market bets it will lag other central banks in dialling back crisis-mode policies.
Rising commodity costs have pushed Japan's wholesale inflation to a 13-year high in September. But the pass-through to households has been remarkably slow due to sluggish domestic demand, keeping consumer inflation stuck around zero.
That leaves Japan as an outlier to other major economies, especially as intensifying global inflation pressure is prompting more central banks to consider withdrawing their massive stimulus.
In fresh quarterly estimates, the BOJ cut its consumer inflation forecast for the year ending in March 2022 to 0 percent from 0.6 percent due largely to the impact of cellphone fee cuts and a change in the base year for the price index.
The central bank also slashed this year's economic growth forecast on sluggish consumption and the hit to factory output from supply disruptions caused by the COVID-19 pandemic.
"Service consumption will remain under pressure from the pandemic, while exports and output will temporarily slow due to supply constraints," the BOJ said in a statement.
"But the economy is likely to recover as the impact of the pandemic gradually fades," it said.
As widely expected, the BOJ maintained its target for short-term interest rates at -0.1 percent and that for 10-year bond yields around 0 percent at the two-day rate review that ended on Thursday.
The projections highlight the policy gap between Japan and other economies. In Australia, core inflation sped to its fastest annual pace since 2015, heightening expectations its central bank could soon follow New Zealand in raising interest rates.
Economists from around the world expect 13 of 25 central banks would raise rates at least once before the end of next year, a global Reuters poll showed.
Japan's economy emerged from last year's coronavirus pandemic-induced doldrums as robust overseas demand propped up exports, offsetting some of the weakness in consumption.
But supply bottlenecks and chip shortages have hit manufacturers, clouding the outlook for the export-reliant economy. Retail sales fell for a second month in September as consumers limited spending on caution over the pandemic, adding to uncertainty over Japan's fragile recovery.
Markets are also focusing on whether BOJ Governor Haruhiko Kuroda will issue any warning against the yen's recent weakness, which boosts exporters' earnings but drives up already high import costs for retailers still reeling from the pandemic's impact.