BOJ seen upgrading next year's growth forecast as stimulus eases pandemic pain: sources

TOKYO (Reuters) - The Bank of Japan is expected to slightly revise up its economic forecast for next fiscal year on hope the government’s stimulus package will moderate the pain from state of emergency measures to combat COVID-19, sources familiar with its thinking said.

FILE PHOTO: A man wearing a protective mask walks past the headquarters of the Bank of Japan amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020.REUTERS/Kim Kyung-Hoon/File Photo

In a quarterly review of its projections due out next week, the central bank is also seen roughly maintaining its view the world’s third-largest economy is headed for a moderate recovery, three sources said on condition of anonymity.

Having already extended last month a raft of measures to ease funding strains for firms hit by the coronavirus pandemic, the BOJ is expected to hold off on ramping up stimulus at the Jan. 20-21 policy meeting, the sources said.

The central bank, however, will likely warn of escalating risks from the new state of emergency measures that are set to cool consumption, they said.

“There’s a lot of uncertainty and risks are skewed to the downside. But conditions haven’t deteriorated enough to overhaul the BOJ’s baseline economic scenario,” one of the sources said, a view echoed by two other sources.

The government said on Wednesday it would expand a limited state of emergency it declared for the Tokyo area last week to seven more prefectures, heightening the chance of another recession for the world’s third-largest economy.

While the fresh curbs will dent January-March growth, the BOJ expects robust exports and the effect of the government’s stimulus package to offset some of the pain in the next fiscal year beginning in April, the sources said.

In its last projections released in October, the BOJ expected the economy to expand 3.6% next fiscal year, following this year’s estimated 5.5% contraction.

The central bank may slightly trim its forecast for the current fiscal year ending in March, reflecting the hit from renewed emergency measures, the sources said.

The October forecasts did not take into account the effect of a $700-billion third stimulus package rolled out in December.

The government expects the economy to expand 4% next fiscal year due partly to the boost from the stimulus package, far rosier than private-sector forecasts of a 3.3% increase.

After suffering its worst postwar contraction in April-June last year due to lockdown measures to combat COVID-19, Japan’s economy has been recovering thanks to solid exports and robust domestic demand for durable goods.

Many BOJ officials expect the new curbs to be less damaging to the economy than the stricter and broader restrictions imposed last year.

But some officials worry that the state of emergency could be extended beyond the current plan of a month, and drag on growth longer than initially expected, the sources said.

The state of emergency could affect the BOJ’s deliberation on ways to make its policy more sustainable, including by addressing the side-effects of prolonged easing, analysts say.

The BOJ eased monetary policy twice last year to cushion the fallout from the pandemic, including by ramping up asset buying and creating a new lending scheme to help cash-strapped firms.

Many BOJ officials are cautious about easing further in the near-term, as steps to boost demand would run counter to government efforts to have citizens stay home, the sources said.

With the pandemic seen prolonging its battle to achieve its elusive 2% inflation target, the BOJ last month decided to conduct a review of its policy framework and announce its findings in March.

Reporting by Leika Kihara; Editing by Chris Reese,Sam Holmes and Kim Coghill