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Japan’s central bank upgrades growth forecast

July 15th, 2010

The Bank of Japan upgraded its growth projections for the fiscal year to 2.6 per cent from 1.8 per cent today.

The central bank made the projection as the economy is expected to continue recovering on the back of healthy exports and a pickup in domestic demand.

The significant upgrade from a projection made just three months ago suggests BoJ officials are confident that solid sales of Japanese goods in emerging countries such as China will continue as a key driver of the economy, prompting firms to boost capital spending and increase wages.

They also appear to believe the measures the central bank has taken so far have been effective in propping up the economy and preventing prices from falling further.

At the end of the two-day meeting, the BoJ’s policy board voted unanimously to leave the unsecured overnight call loan rate at 0.1 per cent, where it has been since December 2008. The bank also kept its monthly economic assessment unchanged, with the economy recovering at the BoJ’s expected pace.

“Japan’s economy shows further signs of a moderate recovery, induced by improvement in overseas economic conditions,” the central bank said in a statement.

The economy “is likely to be on a recovery trend”, with the on-year rate of decline in consumer prices “expected to slow as the aggregate supply and demand balance improves gradually”, the bank said.

In June, the BoJ introduced a new facility to make 3 trillion yen worth of one-year loans available to private banks at the bank’s overnight policy rate of 0.1 per cent. The program aims to encourage lending to companies in high-growth areas, such as environment-related businesses and child-care services.

A person familiar with BoJ thinking told Dow Jones Newswires last week that the central bank will monitor the facility’s effectiveness, suggesting it has little intention of taking additional easing measures soon.

But many analysts say the BoJ could be pressured to take further action as fears grow that sovereign debt concerns in Europe could continue to rattle financial markets and drag on the global economy.

The BoJ board today projected 1.9 per cent growth in the next fiscal year, which begins in April 2011, slightly down from the 2 per cent rise it forecast three months ago. That suggests some BoJ board members have become cautious about the economic outlook.

Growth in external demand could continue to underpin the Japanese economy, but “there are also downside risks such as those related to international financial developments”, the BoJ said.

“Attention should be paid to the effects of developments in fiscal and financial conditions in some European economies on international finance and the global economy,” the bank added.

Analysts say that if Japan’s economy loses momentum, political pressure for the BoJ to do more may grow.

Results of a recent parliamentary election mean the ruling Democratic Party of Japan may form a coalition with Your Party, a smaller grouping that advocates more aggressive monetary easing against deflation. Your Party has proposed revising the existing BoJ law to create a framework in which the government and central bank share policy goals, effectively pressing the BoJ to consider more easing.

“If the economy weakens, the end of deflation could become far off and political pressure will likely intensify on the BoJ to do more,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

The BoJ revised its median forecast for the core consumer price index for this fiscal year to a 0.4 per cent fall, from a previous prediction of 0.5 per cent decline. The median forecast for fiscal 2011 remained unchanged, at a 0.1 per cent rise.