Japan's GDP downgrade, shaky business mood cloud BOJ hike timing
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[July 01, 2024] By
Leika Kihara
TOKYO (Reuters) -Japan downgraded first-quarter gross domestic product
(GDP) on Monday and the service-sector business mood soured in June on
concerns over rising costs, offsetting a lift in factory confidence and
pointing to weakness in consumption.
But the "tankan" quarterly survey showed firms planned to ramp up
capital expenditure and projected inflation to stay around the Bank of
Japan's target of 2% in coming years, keeping alive market expectations
of a near-term interest rate hike.
The findings, which come ahead of the BOJ's next policy meeting on July
30 and 31, complicate its decision on how soon to raise interest rates,
analysts say.
"The improvement in business sentiment may have peaked, particularly for
non-manufacturers. This data doesn't necessarily help the BOJ make the
case for an early rate hike," said Toru Suehiro, chief economist at
Daiwa Securities.
"But corporate inflation expectations heightened slightly, which will
likely keep alive market expectations for a near-term rate hike."
A rare unscheduled downgrade to Japan's historical gross domestic
product (GDP) data showed the economy shrank more than reported in the
first quarter, which will probably force the BOJ to cut its growth
forecasts this month.
Separately, the BOJ's tankan showed service-sector firms were less
optimistic in June than three months ago, suggesting a tight job market
and soft consumption were hurting sentiment.
An index of big non-manufacturers' sentiment fell to +33 in June from
+34 in March, matching market forecasts and worsening for the first time
in two years.
By contrast, the headline index measuring big manufacturers' mood rose
to +13 in June from +11 in March, exceeding a median market forecast for
a reading of +12.
The reading, the highest since March 2022, reflected a rebound in auto
output and manufacturers' success in passing on rising costs of raw
material through price hikes.
Big firms plan to increase capital expenditure by 11.1% in the current
fiscal year ending in March 2025, after a gain of 10.6% in the previous
year, the tankan showed.
In a sign of rising inflationary pressure, an index of output prices
rose for both manufacturers and non-manufacturers, the survey showed.
Long-term corporate inflation expectations also heightened slightly,
with companies projecting inflation to hit 2.3% three years from now and
2.2% five years ahead, the tankan showed.
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A worker assembles an air drill at the factory of manufacturer
Katsui Kogyo in Higashiosaka, Japan June 23, 2022. REUTERS/Sakura
Murakami/File photo
"Corporate inflation expectations seem anchored at 2%," said Ko
Nakayama, chief economist at Okasan Securities. "The tankan is a
tailwind for the BOJ in normalizing monetary policy."
The Nikkei stock average Monday up 0.12%, having pared gains after
the tankan on expectations that rising inflation prospects will
prompt the BOJ to raise rates soon.
GDP MAY AFFECT BOJ RATE HIKE TIMING
The BOJ ended negative interest rates in March on the view that
sustained achievement of its 2% inflation target has come into
sight. Governor Kazuo Ueda has signaled the chance of more hikes if
underlying inflation heads toward 2%, as it projects.
Many market players expect the BOJ to raise rates again this year
with some betting on the chance of action in July. Others, however,
see hurdles for the BOJ to act so soon.
A revision to historical data showed Japan's GDP shrank an
annualized 2.9% in January-March, down from an earlier estimate of a
1.8% contraction, reflecting corrections in past data on
construction orders.
The GDP for last year's third and fourth quarters was also revised
down.
The revisions, which came on top of recent weak consumption and
output data, are likely to affect the BOJ's quarterly growth and
price forecasts due at its July 30-31 policy meeting.
Yoshiki Shinke, an economist at Dai-ichi Life Research Institute,
expects the GDP revisions to lead to a significant downgrade in this
fiscal year's growth forecast.
"I wonder if the BOJ can manage to trim bond buying and hike rates
simultaneously in July, when there's a growth downgrade showing the
economy was in worse shape than thought," he said.
(Reporting by Leika Kihara; Additional reporting by Yoshifumi
Takemoto; Editing by Sam Holmes and Clarence Fernandez)
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