BOJ may slightly cut economic forecast, policy seen steady

Wed Jul 9, 2014 5:00am EDT
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By Leika Kihara

TOKYO (Reuters) - The Bank of Japan may trim its economic growth forecast for the current year next week, sources familiar with its thinking said, reflecting soft exports and a bigger-than-expected slump in household spending after a sales tax hike in April.

But the central bank will roughly maintain its upbeat price projections and stick to its view that the world's third-largest economy will continue a moderate recovery as the pain from the tax hike heals, the sources said on condition of anonymity.

With no major change in the broad economic outlook, the BOJ is set to maintain its policy framework, under which it has pledged to increase base money by 60-70 trillion yen ($590-$689 billion) per year via aggressive asset purchases. The decision is expected at the end of a two-day meeting on July 15.

"The economic contraction in April-June appears to be bigger than expected, so it won't be surprising if the BOJ cuts its growth projection," said Junko Nishioka, chief Japan economist at RBS Securities.

"But doing so may heighten market expectations of additional monetary easing, which the BOJ wants to avoid. It's tricky."

Japan's economy clocked its fastest pace of growth in more than two years in the first quarter as consumer spending jumped and business investment turned surprisingly strong ahead of the sales tax increase in April to 8 percent from 5 percent.

The BOJ has acknowledged that growth will contract in the second quarter in response to the tax increase, although it has said the downturn will be mild and temporary as companies raise wages and hiring due to brightening economic prospects.

But a bigger-than-expected slump in May household spending has led to a growing market view that the economy may contract more than expected in April-June, which would weigh on growth for the full business year.   Continued...

A security guard salutes at the entrance of the Bank of Japan building in Tokyo January 22, 2014.  REUTERS/Yuya Shino