BOJ upbeat on outlook, despite weakness in exports and output

Central bank says effect of sales tax subsiding as jobs and income pick up

PUBLISHED : Friday, 08 August, 2014, 4:21pm
UPDATED : Tuesday, 12 August, 2014, 6:42pm

The Bank of Japan maintained its view that the world's third-largest economy is recovering but offered a bleaker take on exports and output, nodding to a recent batch of soft data that dashed hopes that overseas shipments will pick up in time to offset the pain from a sales tax rise in April.

Bank governor Haruhiko Kuroda remained upbeat about the outlook for the economy, underscoring the central bank's conviction that no fresh stimulus is required even though data next week is expected to show the biggest contraction in economic activity since the global financial crisis.

"Japan's economy is likely to continue recovering moderately with the effect [of an April sales tax increase] seen gradually subsiding," Kuroda said yesterday. "Exports and output have been weakening, but a positive economic cycle remains in place as job and income conditions steadily improve."

The central bank downgraded its assessment of exports, which it has been counting on to support the economy as the tax increase crimps consumption.

The central bank also acknowledged "some weakness" in industrial output.

"The bank does not need to change its expectations that inflation will accelerate again due to strong domestic demand," said Shuji Tonouchi, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. "However, risks from overseas have risen and this puts the bank in a more uncomfortable position."

As expected, the central bank maintained its policy framework, under which it has pledged to increase base money by 60 trillion yen (HK$4.6 trillion) to 70 trillion yen a year through asset purchases to reflate the economy and drive inflation towards 2 per cent next year.

Exports unexpectedly fell in June for a second month and output plunged at the fastest pace since the March 2011 earthquake, casting doubt on the bank's view that the economy would fairly quickly ride out the pain from the April tax rise.

A private factory survey showed new export orders grew modestly in July for the first time in four months. Adding to the gloom, the Nikkei-225 Index closed down 3 per cent yesterday on worries escalating tensions between Russia and the West could hurt global growth.

While the Bank of Japan already expects the economy to shrink in the second quarter due to the tax rise effect, the contraction may prove to be bigger, and the rebound more modest, than projected, given the delay in an export pick-up and weak household spending, analysts say.

The April-June gross domestic product data, due out next week, was expected to show Japan's economy shrank an annualised 7.1 per cent on the tax rise pain, an analyst poll showed.

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