Weak data to test BOJ's rosy economic view, policy on hold
By Leika Kihara
TOKYO (Reuters) - The Bank of Japan will maintain its existing stimulus policy and optimistic economic view on when it meets on Thursday, sources say, preferring to take more time to gauge whether a run of weak data is sufficient to threaten a fragile recovery.
But signs of prolonged disruption from a sales tax hike in April are beginning to sap the conviction of many central bankers that the economy will rebound steadily from a severe second-quarter contraction caused by the higher levy.
While the BOJ is likely to stick to its assessment that the economy is recovering moderately, pessimists on the board may propose offering a bleaker view on components such as factory output, say sources familiar with the bank's thinking.
"It's pretty clear from data out so far that the economy is undershooting the BOJ's forecast," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. "The rebound in July-September may prove to be much weaker than expected."
The BOJ cut its assessment on exports earlier this month to say they were "weakening" but left intact its view that factory output, while also weakening, continues to "rise as a trend".
That view may be subject to change after data on Friday showed July's factory output barely recovered from a steep fall in June, which was the biggest retreat since the March 2011 earthquake as weak sales left firms with huge inventories.
Household spending fell more than expected in July and analysts expect bad weather and lasting effects from the tax hike to weigh on consumption in coming months, casting doubt on the BOJ's view that domestic demand remains firm.
The recent run of weak data will be closely scrutinized at the BOJ's two-day rate review that ends on Thursday. Continued...