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BOJ Meets Q2 Contraction Tests

BOJ Meets Q2 Contraction TestsBOJ Meets Q2 Contraction Tests

The Bank of Japan is expected to maintain its massive monetary stimulus and optimism on chances that it will hit its inflation target at a policy review later this week, even though the economy is expected to have contracted in the second quarter.

The gross domestic product data is set to be released on Aug. 17, but going by weakness in exports and an unexpected decline in household spending, among other indicators, analysts fear the world’s third-largest economy contracted, Yonhap reported.

Any recovery in the current quarter was likely to be modest, they said.

Their gloomy assessment is at odds with the BOJ’s more rosy scenario that a tightening job market will boost wages and consumption, helping accelerate inflation toward its 2% target by around September next year, lifting the economy out of a long deflationary phase.

Some analysts warn that private consumption may fail to gain momentum if rising food costs dampen household sentiment, or bad weather hits summer shopping like last year.

If consumer spending, exports and production all weaken at the same time this would cast even more doubt on the BOJ’s argument that inflation will accelerate later this fiscal year.

“What’s worrying is the weakness in the economy, which may hit the underlying price trend with a lag,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

Renewed falls in oil and commodities prices are also adding downward pressure on inflation, making it increasingly uncertain whether price growth will accelerate quickly as the BOJ projects.

While inflation has stalled near zero, the central bank sees no imminent need to deploy additional stimulus and stresses that it will look beyond the effect slumping oil prices has had on subduing price rises.

With no policy change expected, the nine-member board is likely to debate such risks to the outlook.

  Kuroda’s Optimism

At the two-day rate review ending on Friday, the BOJ is widely expected to keep intact its pledge to increase base money at an annual pace of ¥80 trillion via aggressive purchases of government bonds and risky assets.

BOJ Governor Haruhiko Kuroda is expected to tell a briefing after the meeting that the economy will rebound from an expected soft patch in the second quarter, as rising wages and corporate profits are set to boost consumption and capital expenditure.

But not all central bankers share Kuroda’s optimism. Board member Koji Ishida warned last week that China’s slowdown and feeble Asian demand may weigh on exports and factory output.

“There’s a risk the recent softness in exports and output may hurt corporate sentiment just when companies were beginning to turn more aggressive on investment,” he said on Thursday.

Financialtribune.com