Bank of Japan keeps policy rates unchanged

Japan's government kept its assessment of the economy unchanged this month but warned that consumer prices are rising at a slower pace, casting more doubt on policymakers' three-year effort to shake off deflation.

"Japan's consumer prices are rising at a slower pace," the Cabinet Office said in its monthly economic report on Friday, while maintaining that the economy remains in a "moderate" recovery. 

The assessment comes a day after the Bank of Japan (BOJ) cut its view on consumer inflation and refrained from offering additional monetary stimulus despite a weak global economy and anaemic inflation.

The government's new assessment is more pessimistic than last month's, when it said consumer prices were rising gradually.

While the government said the change in assessment was not a downgrade, it could fan more concerns that the BOJ will have difficulty reaching its 2% price target by March 2018. 

Even as the BOJ stood pat, there were expectations that the central bank will ease further at its next meeting in July, when it issues fresh quarterly growth and inflation forecasts.

Some economists predict the central bank could take a three-pronged approach in July: increasing its already massive government bond purchases, buying more riskier assets and cutting rates further into negative territory.

Economists also worry that a firming yen, which makes imports cheaper, will further dampen inflation.

The yen spiked to a 22-month high of 103.61 yen to the dollar following the BOJ's decision, fuelled by yen bulls who were already selling the dollar after the US Federal Reserve held off on raising interest rates on Wednesday and slightly cut its outlook.

The government, however, maintained its overall assessment of the economy, citing rising wages and high corporate profits. 

"Japan's economy remains on track for recovery, while weakness can be seen," the Cabinet Office said in its report.

The government did not change its assessment that private consumption was "almost flat" and consumer confidence was at a standstill. It also maintained its view that capital spending was "picking up" and exports were "almost flat."