Economy past the worst, but recovery will be slow: BOJ head

Tokyo

BANK of Japan (BOJ) governor Haruhiko Kuroda said that Japan's economy was past the worst, but warned that the recovery would be slow, adding that he remains ready to take further action if needed. His comments came after the BOJ kept its short-term interest rate at -0.1 per cent, its 10-year yield target around zero and left its asset purchases unchanged earlier Wednesday.

Some 96 per cent of economists surveyed before the decision predicted that the central bank wouldn't add to its stimulus at the meeting. The bank's economic forecasts, updated at the meeting, point to a deeper slump this year, but suggest a slightly faster pick-up in the following years, though the recovery will still be drawn out.

Consumption of goods and production had already bottomed, Mr Kuroda said at a press conference. "But it's a deep trough so while the speed of rebound is fast for now, I'm not optimistic that the pace will continue. I believe the recovery following that will be gradual."

The latest decision and projections suggest the central bank, like many of its global peers, is digging in for a long holding pattern on policy while it keeps a close eye on virus developments, corporate solvency, unemployment and market stability.

"The Federal Reserve and the European Central Bank aren't ready to introduce new policy measures and neither is the BOJ," said Nobuyasu Atago, economist at Okasan Securities and a former BOJ official. "The economy is far from normalising. The BOJ is looking to monitor the effectiveness of its current policy measures, as it does what it can. But the BOJ isn't in a position to be taking additional action like deepening its negative rate, which would cause side effects," he added.

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Even though Japan has faced a far less deadly Covid-19 outbreak than in Europe and the US, a recent rise in Tokyo cases - a reported 165 new cases on Wednesday - pushed the city to raise its warning level on Wednesday, fuelling continued caution among policy makers, companies and households over a possible resurgence. But the status of the pandemic beyond Japan's shores also remains a major concern. The country's manufacturers are heavily reliant on demand from markets where the virus outbreak rages on.

The BOJ has now refrained from further policy action at its two most recent regular meetings, following a flurry of action during the early days of the pandemic when it expanded purchases of corporate bonds and stock funds, pledged to buy as much government debt as needed to keep yields low and introduced two lending programmes for struggling companies.

Last month, the BOJ estimated the size of its two special funding programmes for struggling companies at 90 trillion yen (S$1.2 trillion). The outstanding amount of loans under the programmes was 22.6 trillion yen, according to the central bank last week. Japan's bank lending rose at the fastest pace in almost three decades last month, partly due to those programmes.

While bankruptcies rose 6.3 per cent in June from a year earlier and unemployment increased to 2.9 per cent in May, the figures suggest that central bank and government efforts are helping to limit the damage from the crisis. The uptick in the jobless rate is far smaller than the jumps seen in other developed economies.

"For now I expect the BOJ to remain in wait-and-see mode. Of course, if there's a second wave of Covid-19 infections, the BOJ will have to think about its response, but for now they've done all they can," pointed out Masaki Kuwahara at Nomura Securities.

The board said that it sees the economy shrinking 4.7 per cent in the 12 months through March 2021. In April, it saw a contraction of somewhere between 3 per cent and 5 per cent.

The return of a median projection suggests that the bank is now less uncertain about the path ahead. BLOOMBERG