April 3, 2014 / 6:39 AM / 4 years ago

BOJ seen holding rates as tankan signals softer outlook

TOKYO (Reuters) - The Bank of Japan is expected to stand pat on monetary policy and maintain an upbeat view of the economy next week, unfazed by corporate-sector concerns a sales tax hike may dent growth and delay a sustainable exit from deflation.

Bank of Japan Governor Haruhiko Kuroda speaks during a seminar in Tokyo March 20, 2014. REUTERS/Yuya Shino

Market expectations for additional stimulus in coming months were kept alive when the central bank’s “tankan” survey showed companies forecast a worse chilling effect from the tax hike, which kicked off this month, than they did with the previous increase in the tax in 1997.

But central bankers have focused on brighter spots in the survey, pointing to signs of decreasing slack in the economy that would help them meet their pledge of accelerating inflation to 2 percent by around April next year.

“I don’t think the BOJ puts much importance on the worsening outlook sentiment. It’s a risk, but the tankan’s outlook index tends to exaggerate pessimism,” said Masaaki Kanno, chief Japan economist at JPMorgan Securities.

“Judging from (Governor Haruhiko) Kuroda’s recent comments, the BOJ won’t act to pre-empt the pain from the tax hike. The timing of its next action pretty much depends on how the data plays out in coming months,” he said.

At the two-day rate review ending Tuesday, the BOJ is widely expected to maintain its commitment to increasing base money, its key policy gauge, at an annual pace of 60-70 trillion yen ($578-$675 billion).

The central bank is also likely to stick to its assessment that the economy will recover moderately, despite risks such as the tax hike and sluggish exports.


The BOJ has held its rates since launching an intense burst of stimulus last April, when it pledged to accelerate inflation to 2 percent in roughly two years via aggressive asset purchases in a country mired in deflation for 15 years.

Kuroda has repeatedly said Japan can overcome the disruption from the tax hike without additional monetary stimulus, although he has stressed the bank is ready to act if achievement of its price target is threatened.

For now, the BOJ is in no mood to act as it sees more positive signs in the tankan than markets do. Many central bank officials shrug off the worsening business outlook as natural, given the corporate mood is already very bullish.

Other indices in the survey indicate more companies see shortages in workforce and production capacity, which should eventually push up wages and overall prices.

A preliminary estimate by the BOJ is likely to show Japan’s output gap closed to around zero in the first quarter of this year, sources said, suggesting that the steady recovery has finally taken up any slack in the economy.

To the BOJ, its new survey that showed corporate Japan expects consumer prices to rise only 1.5 percent a year from now is also little cause for concern as it suggests that inflation expectations will gradually heighten.

Governor Kuroda is therefore likely to stress that Japan is making steady progress in meeting the bank’s price goal, suggesting no stimulus on the near-term horizon.

The upbeat tone of the BOJ will probably lay the groundwork for the central bank’s semi-annual outlook report on the economy and prices due on April 30.

Many analysts expect the BOJ to cut its economic growth estimate of 2.7 percent for the year that ended in March, taking into account a downward revision in gross domestic product (GDP) growth in the final quarter of last year.

But the central bank is likely to maintain its bullish price forecasts and predict consumer inflation accelerating towards 2 percent in coming years, on a view that brisker economic conditions will push up wages and prices.

Growth in the world’s third-largest economy slowed in the final quarter of last year as the effect of the government’s reflationary policies began to fade. Analysts expect the economy to contract in April-June due to the tax hike, before returning to moderate growth in following quarters.

A Reuters poll showed analysts expect the BOJ to ease again by July on doubts that core consumer inflation, which rose an annual 1.3 percent in February, will accelerate further.

($1 = 103.7200 Japanese Yen)

Editing by Eric Meijer

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