TOKYO (Reuters) - The Bank of Japan is set to continue its massive asset purchases and retain its rosy view on the outlook on Friday despite a series of weak data, underscoring its conviction that the world’s third biggest economy can withstand the pain from a tax hike without further stimulus.
Some BOJ policymakers may propose offering a bleaker view on exports and output than last month, given the recent gloomy data that dashed hopes exports will pick up in time to offset a slump in consumption after the sales tax hike in April.
But Governor Haruhiko Kuroda’s resolutely upbeat forecasts are expected to prevail, so changes in the BOJ’s language, if any, will be minor and unlikely to signal the chance of further monetary loosening in the near-term, according to sources familiar with the bank’s thinking.
“A positive cycle of output, income and expenditure is firmly in place, so we can say Japan’s economy continues to recover moderately as a trend,” Kuroda said last week, sticking to his optimistic view on the outlook.
At its two-day rate review that ends on Friday, the BOJ is expected to maintain its policy framework, under which it has pledged to increase base money by 60-70 trillion yen ($587-685 billion) per year through aggressive asset purchases to reflate the moribund economy and drive inflation toward 2 percent sometime next year.
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 tax hike.
A private factory survey showed new export orders grew in July for the first time in four months, although only modestly.
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.
The board is thus likely to debate whether to offer a bleaker assessment than last month, when it said export growth remains “flat” and output “continues to rise moderately as a trend.”
The BOJ policymakers are also seen scrutinising soft wage data for June, which showed only a modest rise 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 will not be available until next week. Analysts polled by Reuters expect the economy to have shrunk an annualised 7.1 percent in the second quarter, the first contraction in nearly two years.
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.
Editing by Kim Coghill & Shri Navaratnam