Daily Times

The Bank of Japan is expected to offer a brighter view next week on the economy, output and exports than in July to signal that they are starting to recover from the devastating impact of the coronavirus pandemic, sources familiar with its thinking said.

The optimism would back up the government’s view that its massive stimulus has helped cushion the blow from COVID-19, at a time when its top spokesman Yoshihide Suga is eyeing a landslide victory in a ruling party election to become next prime minister.

But the BOJ will warn at its policy review that any recovery will be modest and bound with uncertainty, as fears over a renewed spike in infections and fragile global demand weigh on household and corporate spending, the sources said.

“It’s clear the economy is bouncing back from a severe downturn in April-June, which was blamed largely on lock-down measures to contain the pandemic,” one of the sources said, a view echoed by two other sources.

“But it’s hard to judge at this stage how strong the recovery will be, with risks skewed toward the downside,” the source said, a view echoed by two other sources.

The BOJ is set to keep monetary policy steady at the rate review, after having ramped up stimulus twice this year to cushion the economic blow from the pandemic.

On the current state of the economy, the central bank is likely to say that while conditions remain severe, there are some signs of a pick-up, according to the sources.

The view would be more upbeat than the assessment made in the BOJ’s previous meeting in July, when it said the economy remained in an “extremely severe state.”

The central bank is also expected to describe exports and output as recovering, compared with the July assessment that they were “falling sharply,” the sources said.

But the BOJ will point to various risks clouding the outlook, notably the chance a prolonged battle with COVID-19 could prod companies to slash capital expenditure, they said.

Pessimists in the bank also fret that consumption could take a hit later this year if companies start to shed jobs and cut bonus payments to make up for weak sales, the sources said.

BOJ Deputy Governor Masazumi Wakatabe warned of such risks in a speech last week, saying that households and firms may become more cautious about spending if the pandemic persists.

“There’s a chance such temporary external shocks could lead to persistent economic stagnation,” he said.

Japan suffered its worst postwar economic contraction in the second quarter as COVID-19 hit businesses, highlighting the challenges the new premier faces in averting a deeper recession.

Analysts expect growth to rebound modestly in the current quarter thanks to a pick-up in global auto demand that helped lift exports and output.

But prospects for consumption remain patchy with robust spending on durable goods offset by soft demand for services such as tourism, entertainment and dine-outs.

Analysts polled by Reuters in August said they expect the world’s third-largest economy to shrink 5.6% in the current fiscal year to next March, and grow just 3.3% the following year.