Instrant view: BOJ trims growth forecast on quake

By @ibtimes on

The Bank of Japan sharply cut its economic forecast for the current fiscal year due to last month's devastating earthquake but projected a rebound in the autumn, signaling that it has eased policy enough to keep the economy afloat for now.

KEY POINTS

-- In its twice-yearly outlook report on the economy, the central bank said it needs to focus downside risks to the economy for the time being, in a sign it is sticking to its easy policy bias.

-- But the BOJ revised up its economic forecast for the fiscal year ending in March 2013, saying the recovery would accelerate from around October this year.

-- From the autumn onward, the rebuilding of supply chains will make further progress and supply constraints will ease as limits to power supplies begin to show improvement, it said.

-- The BOJ raised its consumer inflation forecast for the year to March 2012 and for the following year, reflecting a recent spike in commodity costs.

-- It revised down its GDP forecast for the current fiscal year to 0.6 percent from 1.6 percent, its forecast in January, while revising up the projection for the following fiscal year to 2.9 percent from 2.0 percent.

-- BOJ Governor Masaaki Shirakawa will hold a news conference later with his comments to come out sometime after 4:15 p.m. (0715 GMT).

COMMENTARY:

YOSHIMASA MARUYAMA, CHIEF ECONOMIST, ITOCHU ECONOMIC RESEARCH INSTITUTE, TOKYO

The BOJ's GDP forecast for 2011/12 is probably as accurate and reasonable as possible, given that the central bank has branches throughout the nation and can get information from staff located in various places in Japan.

We are forecasting a contraction for the economy in the last quarter and in April-June as well, resulting in an expected three straight quarters of contraction from October-December (last year).

The economy is seen showing growth from July-September as supply constraints are likely to ease gradually. But the pace of growth will depend on power supplies and a recovery in automakers' production.

Supply side problems are in focus at the moment, but if a deterioration on the demand side becomes serious there is a possibility the BOJ will ease further.

KATSUTOSHI INADOME, FIXED-INCOME STRATEGIST, MITSUBISHI UFJ MORGAN STANLEY SECURITIES

(On the median core CPI forecast of +0.7 percent in 2011/12)

It's a bit stronger than expected. I thought the forecast would come in at around 0.5 percent for fiscal 2011/12.

You could read that to mean interest rates will not be raised unless prices were to rise by 0.7 percent or more, so for bonds I think it's a positive change.

YOSHITO SAKAKIBARA, ECONOMIST AT JPMORGAN ASSET MANAGEMENT, TOKYO

I think the BOJ's view that a rebound is expected in the autumn is reasonable as fundamentals were recovering before the March quake.

But market participants are still concerned about the status of supply chains as right now it is difficult to accurately predict how much progress companies will make (in restoring factory operations) over the next few months.

(Following comments were made after policy meeting but before outlook report)

NAOMI HASEGAWA, SENIOR FIXED-INCOME STRATEGIST, MITSUBISHI UFJ MORGAN STANLEY SECURITIES, TOKYO

Nishimura's proposal, and the fact that it was rejected by a majority vote, was a surprise. It's quite rare in the history of the BOJ for the views of the governor and deputy governors to be split. Nishimura probably sees the medium- and long-term risks from the quake as bigger than other board members.

The May rate review will be closely watched for whether the BOJ will ease monetary policy further. There is a possibility it may lean toward expanding the asset-buying scheme.

SUSUMU KATO, CHIEF ECONOMIST, CREDIT AGRICOLE SECURITIES, TOKYO

It was a bit of a surprise. Basically, the BOJ governor and deputy governors are seen as holding the same thoughts on policy.

Given sharp drops in industrial production and household spending in data released today, the BOJ could have taken some measures today.

The BOJ probably wants to take actions in accordance with the government's compilation of extra budgets. But it will take time for the government to find financial resources to fund extra budgets for the disaster. And considering weakness in the stock market and expected deterioration in corporate earnings, the BOJ could have announced an increase in its asset-buying program today, as the central bank will eventually have to do.

MASAMICHI ADACHI, SENIOR ECONOMIST, JPMORGAN SECURITIES JAPAN, TOKYO

I didn't think Nishimura was so dovish, so his proposal for easing came as a surprise, but it is understandable that he would be cautious about the economy's outlook, given that uncertainty has increased over the past month due to a prolonged nuclear crisis.

But his proposal for easing is likely to have a limited impact on the Policy Board's future discussions because the BOJ is likely sticking to the view that the economy will start to recover six months from now.

If the economy deteriorates from now, Nishimura's proposal could gain the backing of other board members.

TOM KENNY, SENIOR INTERNATIONAL ECONOMIST, ANZ, SYDNEY

I had been expecting them to announce a further extension or a boost to their asset-purchase program today, given the impact on the activity data has been quite severe, much worse than people had been factoring in and also the fact that confidence is downbeat. I'm still of the view that the Bank of Japan will probably have to, at some point, boost its asset-purchase program.

LINKS:

-- Text of BOJ statement on monetary policy:

http://www.boj.or.jp/en/mopo/mpmdeci/state_2011/index.htm/

BACKGROUND

-- In a policy board meeting earlier on Thursday, BOJ Deputy Governor Kiyohiko Nishimura, in a surprise move, proposed expanding the BOJ's pool of funds for asset buying and market operations by 5 trillion yen ($61 billion), to 45 trillion yen.

-- The proposal was rejected by a vote of one to eight. It is very rare for a proposal by one of the two deputies of the BOJ governor to be rejected.

-- As widely expected, the central bank kept interest rates unchanged at a range of zero to 0.1 percent by a unanimous vote and held off on loosening policy further.

-- It also announced details of a new loan scheme targeting banks in the quake-hit northeast Japan region, unveiled earlier this month. Under the scheme, the BOJ will accept applications for loans until the end of October this year. Each financial institution will be able to borrow up to 150 billion yen from the BOJ.

-- Japan is facing its worst crisis since World War Two after the 9.0 magnitude earthquake and a huge tsunami battered its northeast coast last month, triggering a nuclear plant crisis and power outages that hit factory output.

-- The BOJ eased policy days after the quake by doubling funds set aside for purchases of a range of financial assets, and flooding banks with cash to keep lending rates steady.

-- Factory output fell a record 15.3 percent in March in the aftermath of the March 11 earthquake and tsunami, exceeding the previous record pace of fall after the Lehman shock in 2009, although manufacturers surveyed by the trade ministry expect production to rise in April and May.

-- Core consumer prices fell 0.1 percent in March from a year earlier, the Internal Affairs ministry said on Thursday, with the pace of decline slowing slightly due to rising commodity prices and a shortage of gasoline following the disaster.

(Reporting by Tokyo Policy Team, Sydney bureau; Editing by Michael Watson)

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