BoJ to give rosier view on economy at review

Reuters/Tokyo

The Bank of Japan is expected to keep monetary policy on hold at a review this week while presenting a more upbeat view of the economy, based on growing signs that positive effects are rippling through from the government’s reflationary strategy.

Concerns surrounding Japan’s biggest trading partner may also be discussed at the July 10-11 policy meeting, as some central bankers fear China’s slowing growth and banking sector woes pose risks for both financial markets and Japanese exports.

For now, however, many BoJ officials expect the pickup in the US economy and robust domestic demand to offset a slowdown in shipments of Japanese goods to China.

The central bank is thus seen revising up its assessment of the economy for the seventh straight month to signal that the world’s third-largest economy has, or is close to achieving, a recovery, said sources familiar with its thinking.

The BoJ has projected that Japan’s economy will resume a moderate recovery around the middle of this year, and last month it said growth was “picking up.”

Data released last month confirmed Japan was already out of the shallow recession that took hold in late 2012, as the economy grew at an annualised 4.1% in the first quarter of this year.

“Exports aren’t too strong, but growing, and consumer spending is holding up well. The economy is in pretty good shape and will remain so this quarter and next,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.

“Unless there’s a huge negative shock from overseas, the BoJ won’t have to act for some time,” he said.

The BoJ is widely expected to keep monetary policy steady by maintaining its pledge of increasing base money, or cash and deposits with the central bank, at an annual pace of ¥60tn to ¥70tn ($600bn-$700bn).

Japan’s factory output rose 2% and exports marked the fastest annual pace in more than two years in May, thanks to robust US auto sales and a weak yen, which boosts the competitive advantage of Japanese products sold overseas.

Manufacturers’ business sentiment turned positive in the three months to June for the first time in nearly two years, the BoJ’s “tankan” quarterly survey showed, a sign the recent market turbulence has still to hurt the feel-good mood created by Prime Minister Shinzo Abe’s aggressive monetary and fiscal stimulus.

The central bank stunned markets on April 4 with an intense burst of stimulus, pledging to double its holdings of government bonds and boost purchases of risky assets to meet its 2% inflation target in roughly two years.

The decision, coupled with Abe’s reflationary policies, helped spur a rally in Japanese shares and declines in the yen. Markets suffered a brief setback in late May on expectations the US Federal Reserve will taper its bond-buying programme, but has restored some calm since mid-June.

The market volatility has done little damage to the economy, at least for now. The BoJ revised up its assessment for eight of Japan’s nine regions in a quarterly report on Thursday, a sign the positive momentum is gradually spreading across the country.

BoJ Governor Haruhiko Kuroda claimed some success for the bank’s stimulus plan, stressing that the economy is on track to a steady recovery with signs inflation expectations are picking up.

Indeed, the tankan showed big firms expect to increase capital expenditure by 5.5% in the current business year from April, suggesting that companies — long hesitant to spend due to the murky economic outlook — are finally start to invest.

At this week’s rate review, the BoJ will conduct a quarterly review of its long-term economic and price forecasts.

The nine-member board is unlikely to make major changes to median projections made in April, when it saw core consumer inflation accelerating in coming years to reach 1.9% in the business year ending in March 2016.

That projection, however, is far more ambitious than private-sector forecasts around 1%, a sign many analysts doubt whether prices will rise so quickly in a country mired in deflation for 15 years.

The BoJ may slightly revise up its forecast of a 2.9% economic expansion for the current fiscal year from April, but is seen rougly maintaining its projection of 1.4% growth in the following year and a 1.6% increase for fiscal 2015/16, the sources said.