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BOJ tipped to ease by July; GDP, inflation weak: Reuters poll

Pedestrians pass by an electronic board displaying stock prices, which are reflected in a polished stone surface, in Tokyo March 7, 2014. RE
Pedestrians pass by an electronic board displaying stock prices, which are reflected in a polished stone surface, in Tokyo March 7, 2014. RE

By Kaori Kaneko

TOKYO (Reuters) - The Bank of Japan will ease policy again by July as prospects for higher inflation remain remote and the outlook for the economy weakens, a Reuters poll found.

The world's third-biggest economy posted the strongest growth among industrial powers in the first half of 2013, spurred by Prime Minister Shinzo Abe's reflationary policies. But growth has slowed to around 1 percent in recent quarters as capital spending and consumption weakened.

A further blow when the national sales tax increases in two weeks is likely to convince BOJ policymakers to add to the bank's unprecedented stimulus, the poll said.

"Some economic data for April-June which reflect the sales-tax hike effects will be on the table around July and they will likely show the economy is weaker than the BOJ's view," said Yoshimasa Maruyama, chief economist at Itochu Economic Research Institute.

"This will give the BOJ a reason to ease policy in order to achieve its 2 percent inflation target."

Seven of 16 economists who answered an extra question expect the central bank to ease at its July meeting. Three said the bank will move on April 30, two said October 31 and two said the BOJ won't ease this year.

The pessimism in the poll, taken March 12-14, is in marked contrast to BOJ Governor Haruhiko Kuroda's view. He regularly says Japan is moving steadily out of entrenched deflation and toward his price target, that growth can weather the tax hike and flagging exports will pick up.

But he also says he will not hesitate to act if his forecasts derail, recently telling Jiji news agency there is "no limit" to what the central bank can do if it sees the need to adjust policy.

DIVERGING VIEWS

Expectations that the BOJ will ease, despite Kuroda's upbeat stance, reflect the gloomier view on growth and inflation.

Economists expect Japan's core consumer prices - stripping out the tax-hike effects - will rise 1.0 percent in the fiscal year starting next month, above the 0.9 percent median forecast in a February poll but below the BOJ's projected 1.3 percent.

And while the BOJ expects to roughly hit its target with 1.9 percent inflation the following year, economists predict prices to rise barely half that much, just 1.0 percent, a tick below their February forecast of 1.1 percent.

The 22 economists who gave GDP predictions cut their median forecast for the coming fiscal year to 0.7 percent from February's 0.9 percent, just half the BOJ's 1.4 percent forecast. For fiscal 2015/16, they tipped 1.2 percent growth, down a tad from February's 1.3 percent and off the central bank's projection of 1.5 percent.

Nine out of 17 respondents said the central bank will probably cut its growth forecast in its semi-annual outlook for the economy and prices on April 30.

As for how the BOJ eases, forecasters predict it will expand its purchases of government debt to a range of 195-265 trillion yen ($1.9-$2.6 trillion), according to the poll. The BOJ's current cumulative target is 190 trillion yen at the end of 2014.

The economists forecast purchases of exchange-traded funds at 4.5 trillion yen, versus the BOJ's current target of 3.5 trillion yen, and of real-estate trust funds at 200 billion yen, compared with the BOJ's 170 billion yen target.

RECOVERY WEAK

A rebound in exports is key for Japan's recovery as consumption is expected to suffer from the tax hike, but six of 15 economists surveyed don't expect a full-fledged export recovery this year. Five said it would happen in July-September, three said in April-June, and one said October-December.

Last week, the BOJ cut its assessment of exports in a warning about external demand, despite Kuroda's confidence the weakness is temporary.

"The economy remains on a recovery track, but the pace of pick up in exports is slow and firms' capital spending is weaker than previously thought," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.

"There will probably be talks on an extra budget by the government around summer at the earliest to help the economy and to pave the way for the second sales tax hike."

Abe is expected to decide late this year on whether to proceed with a planned second sales tax hike, to 10 percent from 8 percent, in October 2015.

All 17 poll respondents said pay rises for the coming year would not be enough to offset the tax hike, and 14 said it would be difficult for Japan to establish a positive cycle of higher prices, wages and spending.

Some of Japan's biggest companies, such as Toyota Motor Corp, decided this month to offer workers the most generous pay raises in years. [ID:nL3N0M73T8] But the vast majority of Japanese employees work for smaller companies that have not benefited as much from "Abenomics".

($1 = 101.6300 Japanese Yen)

(Editing by William Mallard)

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