BOJ may slightly cut
economic forecast, policy seen steady
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[July 09, 2014] By
TOKYO (Reuters) - The Bank
of Japan may trim its economic growth forecast for the
current year next week, sources familiar with its
thinking said, reflecting soft exports and a
bigger-than-expected slump in household spending after a
sales tax hike in April.
But the central bank will roughly maintain its upbeat price
projections and stick to its view that the world's third-largest
economy will continue a moderate recovery as the pain from the tax
hike heals, the sources said on condition of anonymity.
With no major change in the broad economic outlook, the BOJ is set
to maintain its policy framework, under which it has pledged to
increase base money by 60-70 trillion yen ($590-$689 billion) per
year via aggressive asset purchases. The decision is expected at the
end of a two-day meeting on July 15.
"The economic contraction in April-June appears to be bigger than
expected, so it won't be surprising if the BOJ cuts its growth
projection," said Junko Nishioka, chief Japan economist at RBS
"But doing so may heighten market expectations of additional
monetary easing, which the BOJ wants to avoid. It's tricky."
Japan's economy clocked its fastest pace of growth in more than two
years in the first quarter as consumer spending jumped and business
investment turned surprisingly strong ahead of the sales tax
increase in April to 8 percent from 5 percent.
The BOJ has acknowledged that growth will contract in the second
quarter in response to the tax increase, although it has said the
downturn will be mild and temporary as companies raise wages and
hiring due to brightening economic prospects.
But a bigger-than-expected slump in May household spending has led
to a growing market view that the economy may contract more than
expected in April-June, which would weigh on growth for the full
In its latest projections made in January, the BOJ expected the
economy to expand 1.1 percent in the current business year that
began in April, higher than a 0.9 percent rise forecast by analysts
in last month's Reuters poll.
The central bank may revise down the forecast slightly, taking into
account the slump in household spending and continued weakness in
"There's uncertainty on how much consumption will rebound from the
downturn caused by the tax hike," said Yoshiki Shinke, chief
economist at Dai-ichi Life Research Institute.
Adding to headaches for central bankers, exports have failed to pick
up despite the competitive overseas advantage they get from a weak
yen, and the outlook remains murky due to sluggish demand in
emerging Asian markets.
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Some BOJ officials also fret that household spending may not rebound
as strongly as expected in July-September, as sales of big-ticket
items like cars and houses -- which saw a rush in demand ahead of
the tax hike -- show little signs of recovery.
The BOJ, however, is likely to maintain its assessment that the
economy continues to recover moderately, encouraged by signs
companies are finally ramping up capital expenditure and raising
wages instead of hoarding on their huge pile of cash.
In its quarterly review of estimates next week, the central bank is
seen roughly maintaining its economic growth projection of 1.5
percent for the next business year to March 2016, and 1.3 percent
for the following year.
It is also likely to stick to its projection that consumer inflation
will accelerate to 1.9 percent in fiscal 2015 and 2.1 percent in
fiscal 2016, from 1.3 percent in the current business year.
The BOJ issues its long-term economic and price projections in a
semi-annual outlook report in April and October of each year, and
reviews them in January and July. They are all conducted on the day
of its policy-setting meetings.
(Additional reporting by Sumio Ito and Yoshifumi Takemoto; Editing
by Kim Coghill)
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