Japan's central bank left its monetary policy unchanged on Thursday and policymakers upgraded the view on the economy as they raised the growth forecasts, expecting ultra low interest rates, fiscal stimulus and better demand from abroad to support above-potential expansion in future.

The Bank of Japan policy board, led by Governor Haruhiko Kuroda, voted 7-2 to retain the central bank's target of raising the amount of outstanding Japan government bond holdings at an annual pace of about JPY 80 trillion.

The BoJ board also voted to retain the -0.1 percent interest rate on current accounts that financial institutions maintain at the bank.

The central bank will purchase government bonds so that the yield of 10-year JGBs will remain at around zero percent.

"Japan's economy is likely to continue expanding and maintain growth at a pace above its potential, mainly through fiscal 2018, on the back of highly accommodative financial conditions and the effects of the government's large-scale stimulus measures, with the growth rates in overseas economies increasing moderately," the bank said in its quarterly outlook report released on Thursday.

"In fiscal 2019, the economy is expected to continue expanding, although the growth pace is projected to decelerate due to a cyclical slowdown in business fixed investment and the effects of the scheduled consumption tax hike."

The bank raised the GDP growth forecast for this fiscal year to 1.6 percent from 1.5 percent seen in January. The outlook for next year was increased to 1.3 percent from 1.1 percent. For 2019, the bank projected 0.7 percent growth.

Meanwhile, the inflation forecast for this fiscal was lowered to 1.4 percent from 1.5 percent. The projection for next fiscal year was retained at 1.7 percent. The outlook for fiscal 2019 was 2.4 percent and 1.9 percent after excluding the effects of the planned consumption tax hike.

"Today's downward forecast adjustment highlights that the Bank is still struggling to lift inflation," Capital Economics economist Marcel Thieliant said.

The economist believes that the Bank remains too optimistic about inflation mainly due to tepid wage growth despite a tight labor market.

Even if inflation picks up more rapidly than anticipated, the Bank has pledged to allow inflation to overshoot the 2 percent target for a while, Thieliant pointed out. And policymakers will feel reluctant to tighten policy ahead of the sales tax hike currently scheduled for October 2019, the economist added.

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