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Bank of Japan Upgrades Growth Forecasts, But Warns of Risks

Industrial production grew 0.5% on-month in December.Industrial production grew 0.5% on-month in December.

The Bank of Japan raised its economic growth forecasts on Tuesday, but kept its policy stance unchanged, as was widely expected in its latest policy review.

The central bank raised its gross domestic product forecast to 1.4% for the current fiscal year, from its previous forecast, made in October, of 1% growth. For fiscal 2017, it raised its economic growth forecast to 1.5%, from 1.3%, and for fiscal 2018, it raised its forecast to 1.1%, from 0.9%, CNBC reported.

The BoJ said in a statement on Tuesday that it expected inflation to rise to around its target of 2% around fiscal 2018. It cited signs that medium-to-long term inflation expectations have stopped declining and were showing some indications of rising.

It also noted the labor market was tightening and that the effects of commodity-price declines were set to dissipate, with a pickup in international commodity prices set to push up consumer prices.

For the current fiscal year, it expected the consumer price index excluding fresh food, its preferred indicator, would fall 0.2%, compared with its October forecast for a 0.1% fall, but in fiscal 2017, the BoJ expected inflation of 1.5%.

The yen briefly strengthened after the decision, with the dollar fetching as little as 113.21 yen after the announcement, compared with as much as 113.73 yen shortly before the statement. At 11:35 a.m., the dollar was fetching 113.53 yen.

In its statement of risks, the BoJ mentioned developments in the US economy and monetary policy, emerging market economies, particularly China, the consequences of Brexit and European debt issues as well as unspecified geopolitical risks.

The central bank had been widely expected to stay the course with its current yield-curve control policy, introduced at its late-September meeting.

The BoJ had set its target yield for the benchmark 10-year Japanese government bond at around 0%. The BoJ has been willing to intervene to keep the benchmark yield in line with its target. In mid-November, the central bank offered a special bond buying operation, helping to boost bond prices and bring the benchmark’s yield closer to its target.

Industrial production grew 0.5% on-month in December, beating a Reuters poll forecast for a 0.3% rise, data released on Tuesday showed. Capital Economics’ senior Japan economist Marcel Thieliant noted that industrial output in the fourth quarter climbed 2% on-quarter.

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