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 If shipments abroad continue to fall short of the central bank's
forecasts, the recovery in the world's third-biggest economy could
stall and the BOJ might be forced to ease policy again in the coming
months.
Growth has returned to Japan, helped greatly by massive monetary
stimulus unleashed 13 months ago when Haruhiko Kuroda took the helm
at the BOJ. Early signs support the bank's view that last month's
increase in the national sales tax will not derail the recovery or
drag Japan back into deflation.
But the BOJ has been notably wrong about exports. The weak yen was
supposed to boost overseas shipments in time to take up the slack
when consumption took a hit from the April 1 tax increase to 8
percent from 5 percent.
"The BOJ's main scenario is for exports to gradually pick up. But
exports remain the biggest risk to the outlook," said an official
familiar with the BOJ's thinking.
The central bank still forecasts export growth will accelerate and
Kuroda's assurances that prices are on track to hit his 2 percent
inflation target have prompted investors to scale back expectations
of further easing later this year.
 But Kuroda is always careful to say the BOJ will not hesitate to
ease again if its price goal is threatened.
Some analysts say that if exports remain feeble, the BOJ may be
forced as soon as July to expand its stimulus by ramping up its
purchases of government bonds and other assets.
In a further sign that slow shipments are weighing on the recovery,
Japan on Monday posted a much lower-than-expected current account
surplus for March, capping the smallest fiscal-year surplus on
record.
There are growing signs that policymakers are becoming less
confident about an export upturn.
The central bank's half-yearly outlook cited exports as a key threat
to economic recovery, saying they may not increase strongly even as
overseas demand picks up.
Kuroda, for all his optimism, also keeps bringing up exports as a
significant risk factor.
Big manufacturers, too, are cautious. Toyota Motor Corp warned on
Thursday its profits may fall this business year as the export
tailwind that it and other Japanese carmakers have received from the
yen's 18-month slide fades.
CLINGING TO HOPE
That creates a communication headache for the BOJ.
Preserving confidence in a sustained economic recovery is an
essential part of Kuroda's strategy. Voicing doubts about a key
element of that scenario too openly could hurt that confidence.
"That's why the BOJ needs to cling to its projection that exports
will recover," said a former BOJ official with knowledge of the
central bank's thinking.
"The export recovery hasn't happened as quickly as the BOJ wanted.
I'm not sure whether everyone at the bank is confident this will
happen."
BOJ policymakers stress that export weakness alone will not trigger
further easing. But they acknowledge that more stimulus may be
forthcoming if the economy is hit by a double-whammy of persistent
export softness and failure of household consumption to rebound from
the post-tax hike slump.
Some of them say July is key because they will have a better sense
by then if exports are picking up as the BOJ expects, and whether
consumer spending has weathered the sales tax hike.
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"The BOJ will probably use weak exports as an excuse to revise down
its rosy economic projections later this year," said Masaaki Kanno,
a former BOJ official who is now chief Japan economist at JPMorgan
Securities.
"It's easy to blame exports because they are swayed by external
factors beyond the BOJ's control," said Kanno, who expects the
central bank to ease again in July. Annual export growth peaked at
18.6 percent in October and skidded to 1.8 percent in March, the
latest data available and the weakest in a year. Shipments to the
rest of Asia, half of the total, were up just 1.4 percent for the
month.
Moreover, export volume fell 2.5 percent in March, showing that the
yen's slide - driven by the BOJ's easy-money policy - is not giving
Japanese goods the competitive edge it once would have.
After having pushed back the expected timing of an export pickup by
several months in its assessments, the central bank now expects a
rebound by the middle of this year.
The BOJ is also starting to cite "structural factors" for the
disappointing performance -- Japanese manufacturers continuing to
shift production overseas and some, such as electronics exporters,
possibly losing their competitive edge to rivals in South Korea,
Taiwan and elsewhere.
"Japan won't return to the days when the weak yen had a more direct
impact on exports," said one official.
But as these trends are not exactly new, bringing them up only
underscores the BOJ's lack of conviction that exports will recover,
some analysts say.
JULY VERDICT
Like the BOJ, many private-sector analysts predict a gradual pickup
in exports, but some warn that such modest gains may not be enough
to make up for the post-tax hike slump in domestic demand.
Household spending and housing starts are set to slow compared with
last year and the impact of last year's fiscal stimulus will also
start to fade.
Economists expect the economy to grow 0.7 percent in the fiscal year
that began last month, well below the BOJ's 1.1 percent forecast,
according to a survey by the private Japan Center for Economic
Research.
Even that conservative estimate assumes export growth will have to
accelerate to 5 percent this fiscal year from 3.5 percent in the
previous year.
Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute,
warned that exports must pick up this quarter and grow enough to
offset the post-tax hike weakness in domestic demand for the BOJ's
rosy scenario to hold.
"Otherwise, a recession is not out of the question and the BOJ may
need to act again," he said. "The verdict should be out around
July."
(Editing by William Mallard and Tomasz Janowski)
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