Two years into so-called Abenomics – a mix of aggressive monetary and fiscal policy plus structural reform – the Bank of Japan is struggling to reach an ambitious inflation target and convince Japanese that years of deflation are in the past.
Instead, inflation is slowing, the economy is only slowing emerging from recession and confidence among the economy's bedrock manufacturers is slipping.
On Wednesday, the Bank of Japan (BOJ) sharply cut its inflation forecast and the governor conceded it may take longer than expected to hit 2% inflation, underlining the challenges of meeting the target as oil prices continue to slump.
The yen rebounded against the dollar and Japanese equities fell after the central bank held off on expanding its stimulus drive, despite nearly halving its core consumer inflation forecast for the year beginning in April to 1%.
Governor Haruhiko Kuroda defended the decision, saying that while the lower cost of fuel may weigh on inflation short-term, it will stimulate the economy and thus accelerate price growth.
As widely expected, the BOJ maintained its pledge to increase base money at an annual pace of 80 trillion yen ($678 billion U.S.) by buying government bonds and other securities.
The central bank instead extended by a year the deadline of several loan schemes aimed at encouraging banks to boost lending, and expanded the size of one of them.
Japan's economy slipped into recession in the third quarter of last year and is only barely emerging from the doldrums as a hit from a sales tax hike in April begins to ease.
