The BOJ slashes development forecast, however signifies that politicians are pausing the restoration prospects. From Reuters
© Reuters. A man wearing a protective mask walks past the headquarters of the Bank of Japan amid the coronavirus disease (COVID-19) outbreak in Tokyo
By Leika Kihara and Daniel Leussink
TOKYO (Reuters) – The Bank of Japan cut its forecasts for economic growth and inflation for the current financial year on Thursday, but was more optimistic about the prospects for the recovery and signaled that it had given enough impetus for the time being.
However, the central bank warned that the outlook was highly uncertain as the pandemic weighs on service sector spending and a resurgence of infections in Europe dampens prospects for a sustained global recovery.
BOJ Governor Haruhiko Kuroda said the bank was ready to extend its crisis response program deadline to March 2021 to help companies in trouble and take additional monetary easing measures if necessary.
“We will extend the deadline if we deem it necessary and appropriate,” he said in a briefing, without clarifying when the BOJ could make the decision.
“There is also plenty of room to expand the extent of easing for each element of our Rapid Response Program,” he added.
As widely expected, the central bank kept monetary policy stable, including a -0.1% target for short-term rates and a commitment to keep long-term rates around 0%.
The BOJ also made no changes to a package of steps aimed at easing the stress on corporate finance, which has become its main tool in dealing with the pandemic-hit economy.
The package includes increased purchases of corporate debt and a new credit facility that aims to move money through financial institutions to smaller businesses.
“As the effects of the pandemic wear off, there may come a time when the debate about how to stimulate growth and meet our 2% price target may come to the fore,” Kuroda said.
“At the moment, however, the most important thing is to respond directly to the consequences of COVID-19 with the package of measures.”
NO BIG TWEAK TO THE BOND BUYING PROGRAM
In a quarterly report on the outlook, the BOJ cut its growth forecast for the current fiscal year through March 2021 from a 4.7% slump forecast in July to 5.5%, due to sluggish service spending over the summer.
The core consumer price forecast for the year was downgraded from a 0.5% decline in July to 0.6%.
However, the BOJ revised its forecast for the next fiscal year to 3.6% from a 3.3% expansion in July.
It has also improved its rating of exports and production to the point that they “increase”. That compared to the view in July when they were said to be falling sharply.
“Japan’s economy is likely to improve as a trend as the effects of the coronavirus pandemic gradually wear off, although the pace of recovery will be moderate,” the report said.
Japan’s economy hit rock bottom after the worst of the post-war slump in April-June, partly due to a recovery in exports and production. According to analysts, however, weak consumer and investment spending should keep the economic recovery modest.
While Kuroda has repeatedly vowed to step up incentives if necessary, a lack of political ammunition and the strain placed on financial institutions from continued easing will limit the BOJ’s scope for large-scale incentives, it said.
Kuroda said the BOJ will be closely monitoring risks in the banking sector, such as the possibility that falling profits from financial institutions could deter them from boosting lending.
He also reiterated that an excessive drop in super-long bond yields could hurt consumer confidence by hurting the returns of pension funds and other long-term investors.
But he brushed aside market speculation that the BOJ could allow yields to rise further by reducing purchases of super-long bonds.
“We are not thinking of stopping buying super-long bonds or revising the way we conduct our bond purchases as part of our yield curve control.”