August 8, 2014 / 3:41 AM / 5 years ago

UPDATE 3-BOJ offers bleaker exports view, but Kuroda stays upbeat

* BOJ keeps massive stimulus programme intact

* BOJ maintains view economy recovering moderately

* Cuts view on exports, output reflecting weak data

* Governor Kuroda remains upbeat on outlook (Adds analyst quote, details)

By Leika Kihara

TOKYO, Aug 8 (Reuters) - The Bank of Japan offered a bleaker view on exports and output a week before data is expected show the biggest contraction in economic activity since the global financial crisis, heightening concerns a rebound may be delayed and increase pressure for further monetary easing.

But BOJ Governor Haruhiko Kuroda remained upbeat about the outlook for the world’s third-biggest economy, underscoring the central bank’s conviction that no fresh near-term stimulus is required to shake off the effects of a sales tax hike in April.

“Japan’s economy is likely to continue recovering moderately with the effect (of an April sales tax increase) seen gradually subsiding,” Kuroda told a news conference on Friday.

“Exports and output have been weakening,” he said. “But a positive economic cycle remains in place as job and income conditions steadily improve.”

Kuroda said exports are set to recover as U.S. and Chinese growth picks up, adding that geo-political risks, such as escalating tensions in Ukraine, will not force the BOJ to alter its upbeat outlook of the global economy at least for now.

He also said Japan’s economy was likely to expand above its potential, deemed at around 0.5 percent or lower, in the current fiscal year from April despite an expected contraction in the April-June quarter blamed on the tax hike.

“The output gap will continue to narrow, so inflation will accelerate from around the latter half of the current fiscal year,” Kuroda said, stressing that Japan is on track to hit the bank’s 2 percent inflation target some time next year.

Some analysts, however, remained unconvinced given exports have so far failed to offset the hit from the tax hike.

“Kuroda sounded bullish on prices, but he didn’t explain what mechanism could see prices rise while economic growth slows,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

“If consumer inflation fails to pick up pace from later this year towards 2 percent next year, the BOJ would come under pressure for further easing,” she said, adding that the bank may ease policy again in October.

The BOJ downgraded its assessment of exports - which it has been counting on to support the economy as the tax hike crimps consumption. “Exports have shown some weakness,” the bank said, revising last month’s assessment they were moving sideways.

It also acknowledged “some weakness” in industrial output.

As widely expected, the BOJ maintained its policy framework, under which it has pledged to increase base money by 60-70 trillion yen ($580-690 billion) per year through aggressive asset purchases to reflate the moribund economy.


Exports unexpectedly fell in June for a second straight month and output plunged at the fastest pace since the March 2011 earthquake, casting doubt on the BOJ’s view the economy will fairly quickly ride out the pain from the April 1 sales tax hike to 8 percent from 5 percent.

Adding to the gloom, the Nikkei share average slumped to a two-month low on Friday, suffering its biggest daily decline in five months as investors were gripped with fear that geopolitical crises in Ukraine and the Middle East could disrupt global growth.

While the BOJ already expects Japan’s economy to shrink in the second quarter due to the tax hike effect, the contraction may prove to be bigger - and the rebound more modest - than projected given the delay in an export pick-up and weak household spending, analysts say.

Some in the nine-member board, such as Koji Ishida, are more cautious about the outlook than Kuroda. Ishida warned last month that structural issues may further delay an export rebound.

Heightening worries for policymakers, wages were soft in June with only a modest rise seen in bonuses and regular pay despite Prime Minister Shinzo Abe’s calls for companies to raise base salaries so consumers can keep spending.

The closely-watched April-June gross domestic product data, due out next week, is expected to show Japan’s economy shrank an annualised 7.1 percent, according to a Reuters poll, the biggest contraction since the global financial crisis.

Some private-sector analysts say such a big contraction in the second-quarter may mean economic growth in the current business year will far undershoot the BOJ’s current projection of an 1.0 percent increase.

The weak GDP data, as well as sluggish wage growth, could also heighten private economists’ scepticism that the BOJ will be able to meet its target of pushing inflation to 2 percent sometime next year without further stimulus.

Kuroda said the BOJ was ready to expand stimulus if the economy worsened enough to derail the path toward meeting the price target. But he stressed the BOJ’s top priority was to meet the price target, not to respond to temporary blips in the economy. As for the price target, the governor said the economy was on track.

His upbeat comments led some analysts to believe the BOJ remains unfazed despite the recent weak data, and that the bank won’t act any time soon.

“Weakness in some economic data so far is not strong enough to change our main scenario that the BOJ is unlikely to ease this year,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.

“If the inflation rate eases well below 1 percent or there is financial market turmoil, then the BOJ could ease as early as next year.” (1 US dollar = 102.1900 Japanese yen) (Additional reporting by Tetsushi Kajimoto and Stanley White; Editing by Kim Coghill, William Mallard & Shri Navaratnam)

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