By Leika Kihara
TOKYO (Reuters) - The Bank of Japan maintained its massive stimulus programme on Wednesday and brushed aside speculation of near-term policy easing, even as inflation ground to a halt and growth stalled two years into its radical experiment to revive the economy.
Concern over diminishing returns from aggressive money printing led one board member to propose reducing its asset purchases, which was voted down 8-1 but underscored the waning conviction that the BOJ will be able to meet its ambitious inflation target.
While its initial timeframe for hitting 2 percent inflation has passed, the BOJ maintained that prices will gradually rise as the economy recovers and higher wages prompt households to boost spending.
After the bank's widely expected decision to leave policy unchanged, Governor Haruhiko Kuroda stuck to his guns.
"The broad trend in prices is steadily improving," he told a news conference, adding that there was no change to the BOJ's aim of reaching its inflation target at the earliest date possible "with a timeframe of two years in mind."
He also said the economy was in much better shape than in October last year, when the BOJ surprised markets by expanding stimulus in response to weak household spending and a sudden slowdown in inflation driven by slumping world oil prices.
"Risks that we saw back in October last year have subsided for now," he said, dispelling speculation that renewed signs of weakness in the economy may spur the bank into action as early as its next meeting on April 30.
NEW TIMEFRAME ELUSIVE
When it launched the stimulus programme in April 2013, economists likened the move to firing a monetary bazooka. The BOJ pledged to achieve 2 percent inflation in roughly two years in a country mired in 15 years of deflation.
The BOJ has been buying bonds and other assets aggressively since then and now aims to boost base money - or cash and deposits at the central bank - by 80 trillion yen (449.21 billion pounds) a year, expanding its balance sheet by an amount equal to the size of Australia's economy.
But the economy remains fragile, casting doubt on the BOJ's argument that its asset purchases will pull Japan out of stagnation by nudging households and companies to spend more.
The BOJ now says inflation will hit 2 percent around this fiscal year ending in March 2016. But even that timeframe appears elusive as prices are seen staying flat or falling for much of this year on low energy costs and tame wage growth.
Many market players thus expect the BOJ to ease again sometime this year. Some see the chance of action on April 30, when the BOJ issues new long-term forecasts that may lead to a cut in its rosy price projections.
Mounting speculation of near-term BOJ action helped boost Japan's Nikkei stock average to a 15-year high on Wednesday.
Kuroda reiterated that the BOJ won't hesitate to act if he sees any signs of change in the price uptrend, now driven by big firms' promises of pay raises in spring wage negotiations.
But convincing his fragmented board may not be easy, as some doubt whether buying more assets will give any meaningful boost to economic activity.
Board member Takahide Kiuchi, who has expressed concerns that massive money printing could sow the seeds of a future bubble, called for the BOJ to cut back its asset buying.
He proposed reducing the base money target, and the annual pace of increase in the BOJ's government bond holdings, to 45 trillion yen.
With the outlook so uncertain, the BOJ appears to be in no mood to celebrate the second anniversary of its stimulus.
A year ago, when inflation was comfortably above 1 percent, Kuroda proudly preached to new graduates joining the central bank of the need to "meet deadlines" for work.
There was no mention of meeting deadlines in his speech last week, when he told newcomers in the central bank that people should always be ready to correct mistakes of the past.