By Leika Kihara and Stanley White
TOKYO (Reuters) - Japan's central bank held its massive monetary expansion unchanged on Friday, and played down chances of the need for an extra dose next year as it took heart from the U.S. Federal Reserve's decision to begin tapering its own mega-stimulus.
Speaking after a Bank of Japan policy-setting meeting, Governor Haruhiko Kuroda welcomed the Fed's move as a sign that the U.S. economy is recovering steadily, which bodes well for global growth and Japan.
Kuroda also played down the likely impact of a planned increase in Japan's sale tax in April on the economy, saying the country was on course to meet the BOJ's 2 percent inflation target in two years to decisively exit from a long phase of debilitating deflation.
The widening interest rate gap between Japan and the United States, as the BOJ maintains its ultra-easy policy while the Fed winds down its stimulus, is likely to keep the yen weak against the dollar, analysts say.
The dollar hit a fresh five-year high of 104.59 yen on Friday, extending the weak-yen trend that has helped Japan's export-reliant economy emerge from stagnation.
"Frankly speaking, the correction of excessive yen strength has had a positive effect on Japan's economy," Kuroda told a news conference, while stressing that BOJ policy was not directly targeting the exchange rate.
"Corporate earnings have risen and sentiment has improved."
Japan's economy outpaced its G7 counterparts in the first half of this year as Prime Minister Shinzo Abe's stimulus policies boosted business and household sentiment.
Kuroda said the BOJ would be watching the impact of the Fed tapering, while seeing it as a good sign.
"The Fed's tapering of its asset purchases is basically because the U.S. economic recovery is proceeding well."
The Fed's success in making the switch to tapering without disrupting markets removed one uncertainty for the BOJ and may give it more time to decide whether further stimulus will be needed in Japan next year, analysts say.
TAX HIKE LOOMS
The BOJ offered an intense burst of monetary stimulus in April, pledging to double the supply of money in two years by boosting purchases of government bonds and risky assets. It has stood pat on monetary policy since then.
On Friday, as widely expected, the BOJ voted unanimously to stick with its strategy of increasing base money, or cash and deposits at the central bank, at an annual pace of 60 trillion yen ($576 billion) to 70 trillion yen.
It also maintained its upbeat view that Japan's economy is recovering moderately, encouraged by growing signs the benefits of its stimulus are broadening.
Kuroda saw Japan overcoming the impact of next April's sales tax hike.
"Economic growth may slump in the second quarter (of next year), but that's in reaction to increased demand in the run-up to the sales tax hike. Taken together, they offset each other," he said.
"There's no change to our view that Japan will make progress steadily toward achieving the BOJ's 2 percent inflation target, albeit with some fluctuations."
His remarks suggest the BOJ sees no reason to consider easing further any time soon, with Japan's economic recovery gathering momentum and the weak yen supporting exports.
But not all in the BOJ are so optimistic with many central bankers foreseeing challenges next year, when the sales tax rise hits consumers and inflation loses some of the boost passed on by a weak yen through higher import costs.
A Reuters poll conducted earlier this month found that almost two-thirds of Japanese firms expect the BOJ to increase its stimulus in the first six months of 2014.
Mindful of concerns about the pain from the tax hike, the BOJ slightly tweaked its view on the outlook to say it will "continue a moderate recovery as a trend" despite the effect of the tax hike. Last month, it only said the economy will continue recovering moderately.
Japan's economic growth slowed in July-September, but is seen accelerating again due to extra demand generated by buying ahead of the sales tax hike, plus an increase in public works spending under a fiscal stimulus plan to cushion the pain from the tax hike.
(Additional reporting by Tetsushi Kajimoto; Editing by Edmund Klamann and Simon Cameron-Moore)