TOKYO: Japan’s central bank has cut its annual growth and inflation forecasts for the world’s third-largest economy, with analysts warning weaknesses remained and the downgrade hinted at a disappointing second quarter.
After a two-day policy meeting, the Bank of Japan (BoJ) said Japan’s economy would expand 1.7% in the fiscal year to March 2016 while inflation would come in at 0.7%. That was down from 2% and 0.8, respectively, estimated earlier this year.
While the bank kept up its view that Japan’s economy was “expected to continue recovering moderately”, it acknowledged that a pick-up in exports and industrial production had seen “some fluctuations”.
Hideo Kumano, senior economist at Dai-ichi Life Research Institute, said that trimming the growth forecasts “probably means growth in the April-June quarter was not very good”. Official second-quarter GDP data are due next month.
BoJ policymakers have been scaling back their expectations and governor Haruhiko Kuroda has conceded that an ambitious 2% inflation target was still some way off. Kuroda will hold a regular post-meeting news briefing later today.
The economy expanded 1% in January-March after limping out of recession in the last three months of 2014, and business confidence remains strong. But consumer spending has struggled after a sales tax rise last year and economists widely expect the BoJ to ramp up its easing programme, likely later this year, to bring Japan closer to its inflation target.
The target is a cornerstone of Prime Minister Shinzo Abe’s drive to conquer years of stagnant or falling prices and revive the economy.
The BoJ stood pat on its record asset-purchase programme, which is pumping about 80 trillion yen (US$648bil) into the financial system annually in a bid to jack up prices and kick-start growth.
“The Bank’s view on the economy remains too optimistic. Economic activity weakened sharply in the second quarter, and business surveys suggest that output will not rebound rapidly in coming months,” Marcel Thieliant from Capital Economics said in a commentary. “Price pressures are unlikely to strengthen as quickly as policymakers hope.”
While a weak yen has boosted the bottom line for many Japanese exporters, Tokyo’s bid to resuscitate the economy has struggled as it tries to rid Japanese consumers of the idea that prices will not rise much.
Deflation may sound good for shoppers, but it means people tend to put off buying because they do not expect prices to rise and hope they might even get goods cheaper down the line. That, in turn, hurts producers and holds back their expansion and hiring plans, which is bad news for the economy, a problem that has weighed on growth for years.
The BoJ’s easing plan, launched more than two years ago, was aimed at changing consumers’ so-called deflationary mindset by forcing prices upward.
But still-tepid inflation puts the BoJ in a tricky position as it has already pushed back its two-year timeline for hitting its inflation target and more delays could dent the credibility of its easing measures, Thieliant said.
“We think that policymakers will instead opt for an expansion of monetary stimulus, perhaps as early as late October,” he added. - AFP
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