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BOJ may slightly cut economic forecast, policy seen steady

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan may trim its economic growth forecast for the current year next week, sources familiar with its thinking said, reflecting soft exports and a bigger-than-expected slump in household spending after a sales tax hike in April.

But the central bank will roughly maintain its upbeat price projections and stick to its view that the world's third-largest economy will continue a moderate recovery as the pain from the tax hike heals, the sources said on condition of anonymity.

With no major change in the broad economic outlook, the BOJ is set to maintain its policy framework, under which it has pledged to increase base money by 60-70 trillion yen ($590-$689 billion) per year via aggressive asset purchases. The decision is expected at the end of a two-day meeting on July 15.

"The economic contraction in April-June appears to be bigger than expected, so it won't be surprising if the BOJ cuts its growth projection," said Junko Nishioka, chief Japan economist at RBS Securities.

"But doing so may heighten market expectations of additional monetary easing, which the BOJ wants to avoid. It's tricky."

Japan's economy clocked its fastest pace of growth in more than two years in the first quarter as consumer spending jumped and business investment turned surprisingly strong ahead of the sales tax increase in April to 8 percent from 5 percent.

The BOJ has acknowledged that growth will contract in the second quarter in response to the tax increase, although it has said the downturn will be mild and temporary as companies raise wages and hiring due to brightening economic prospects.

But a bigger-than-expected slump in May household spending has led to a growing market view that the economy may contract more than expected in April-June, which would weigh on growth for the full business year.

In its latest projections made in January, the BOJ expected the economy to expand 1.1 percent in the current business year that began in April, higher than a 0.9 percent rise forecast by analysts in last month's Reuters poll.

The central bank may revise down the forecast slightly, taking into account the slump in household spending and continued weakness in exports.

"There's uncertainty on how much consumption will rebound from the downturn caused by the tax hike," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

Adding to headaches for central bankers, exports have failed to pick up despite the competitive overseas advantage they get from a weak yen, and the outlook remains murky due to sluggish demand in emerging Asian markets.

Some BOJ officials also fret that household spending may not rebound as strongly as expected in July-September, as sales of big-ticket items like cars and houses -- which saw a rush in demand ahead of the tax hike -- show little signs of recovery.

The BOJ, however, is likely to maintain its assessment that the economy continues to recover moderately, encouraged by signs companies are finally ramping up capital expenditure and raising wages instead of hoarding on their huge pile of cash.

In its quarterly review of estimates next week, the central bank is seen roughly maintaining its economic growth projection of 1.5 percent for the next business year to March 2016, and 1.3 percent for the following year.

It is also likely to stick to its projection that consumer inflation will accelerate to 1.9 percent in fiscal 2015 and 2.1 percent in fiscal 2016, from 1.3 percent in the current business year.

The BOJ issues its long-term economic and price projections in a semi-annual outlook report in April and October of each year, and reviews them in January and July. They are all conducted on the day of its policy-setting meetings.

(Additional reporting by Sumio Ito and Yoshifumi Takemoto; Editing by Kim Coghill)

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