Bank of Japan Likely to Cut Economic Forecasts Again on Covid-19

In this article

The Bank of Japan is likely to lower its economic projections again next month as the heavy impact of the coronavirus pandemic on the domestic and global economies becomes clearer.

The International Monetary Fund said earlier this week that it sees the world economy shrinking 4.9% this year, sharply lower than its April view, with Covid-19 seen causing a deeper global recession and a slower-than-expected recovery.

The gloomier world view follows a lengthy state of emergency in Japan that BOJ board members will also need to factor in to their quarterly forecasts when they meet on July 14-15.

42,725 in BrazilMost new cases today

-9% Change in MSCI World Index of global stocks since Wuhan lockdown, Jan. 23

-1.​05 Change in U.S. treasury bond yield since Wuhan lockdown, Jan. 23

-2.​3% Global GDP Tracker (annualized), May

A downgrade of BOJ forecasts by itself is unlikely to prompt further easing action by the bank, though economists say the calculus could change if markets also become more jittery and the yen suddenly strengthens.

“The BOJ will probably cut its projections,” said Hiroshi Miyazaki, a senior economist at Mitsubishi UFJ Morgan Stanley Securities. “That won’t mean more easing, though. Their focus now is on funding of companies and financial markets.”

The central banksignaled at its June meeting that it intended to sit tight and monitor the effects of itsloan programs and other virus measures worth around $1 trillion for the time being.

Still, the need to assess the further deterioration of the economy remains as does the risk of falling back into deflation.

The IMF now sees Japan’s economy contracting more than first thought as it takes a 5.8% hit in 2020 from the virus, bigger than the blow from the global financial crisis.

The BOJ doesn’t have a calendar year forecast. Instead it projects the economy to shrink between 3% and 5% in the fiscal year through March 2021. Economistssurveyed by Bloomberg predict a contraction of 5.3% for the same period.

The BOJ took the unusual step of not revealing the median figure in its range of projections in April, a decision that Governor Haruhiko Kuroda said reflected the high level of uncertainty over the forecasts, in later comments to a lawmaker in parliament.

The likely need to lower the forecasts partly stems from Prime Minister Shinzo Abe’s decision to extend the state of emergency restricting activity in the nation. The emergency was finally lifted in all parts of the country on May 25, meaning the economy was partially shut down for almost two months.

Economists surveyed by Bloomberg expect gross domestic product to shrink an annualized 22% this quarter, the most in more than six decades.

Japan Struggles to Pump Out $2 Trillion in Virus-Response Aid

In addition to the BOJ’s loan programs and asset buying, the Abe administration has put together $2.2 trillion in virus response measures. While the package has been described by Abe as the world’s biggest stimulus package at more than 40% of gross domestic product, its distribution has been relatively slow so far.

How much the stimulus will lift the economy will likely be a key part of BOJ discussions.

Source: Read Full Article