Analysts trim Japan's GDP forecast for H2, see feeble Q3 rebound

Tokyo

THE Bank of Japan's (BOJ) confidence in underlying economic growth is wavering in the face of evidence of weakness, making officials cautious about the outlook for a pick-up in inflation, according to people familiar with the discussions.

For months, BOJ officials regarded a downturn in the economy in the second quarter as a temporary soft patch, with growth and inflation likely to pick up in ensuing months.

Now, the outlook may not be so clear, with weakness in industrial output and exports weighing on a rebound, and renewed declines in oil pressuring inflation expectations, according to the people, who asked not to be named because the discussions were private.

Governor Haruhiko Kuroda said on Aug 26 in New York that recent weakness in production and exports would pass and that, while the central bank was ready to adjust monetary policy if necessary, the current level of stimulus was enough to spur consumer price gains to its 2 per cent target. The BOJ chief last October unexpectedly expanded easing to ward off the risk of an extension in a "deflationary mindset" in the wake of a tumble in oil prices.

With Mr Kuroda's repeated expressions of confidence in a rebound in inflation, some economists have pared back their expectations for additional monetary stimulus, surveys show. Turmoil in China's markets, along with domestic weakness, could challenge that shift.

These analysts slashed Japan's growth forecast for the second half of this year in a survey released on Monday, as a recent string of weak data dash policymakers' hopes that consumption and exports will rebound enough to pull the economy out of stagnation.

The gloomy predictions come ahead of revised gross domestic product data, due out on Tuesday, that is likely to show Japan's economy fared worse than the originally estimated 1.6 per cent contraction in April-June.

"The rebound in consumption and exports in July has been feeble," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. "It may take more time for the economy to emerge from the doldrums."

A poll of 41 major think tanks, conducted each month by a semi-government body, showed analysts now expect the economy will grow an annualised 1.67 per cent in the current quarter.

That was a sharp downgrade from 2.48 per cent projected in the previous month's ESP survey, regarded as the most comprehensive poll available in Japan.

An unexpected fall in factory output in July reinforced market views that any rebound in July-September economic growth will be modest, keeping the BOJ under pressure to expand its already massive stimulus programme.

On top of that, a slowdown in major trading partner China and recent turmoil in its stock markets have sparked worries of a further hit to Japan's economy.

Summer bonuses rose only slightly, disappointing central bankers who expected big gains in wages as the weak yen and lower oil costs boosted corporate profits.

Analysts also cut their October-December growth forecast to 1.68 per cent from a 1.89 per cent expansion projected in the August survey.

They now expect Japan's economy to expand 1.11 per cent in the current fiscal year ending in March 2016, down from a 1.21 per cent growth forecast in August.

Core consumer prices were also forecast to fall 0.14 per cent in July-September from the same period of the previous year, keeping price growth distant from the BOJ's 2 per cent target.

The BOJ is expected to offer a bleaker view on overseas economies and may lower its assessment on exports at its next rate review, sources say.

"It's becoming more difficult for the BOJ to achieve its bullish scenario for the economy and inflation," said Yasunari Ueno, an economist at Mizuho Securities Co. Mr Ueno, who has been among those predicting the BOJ will step up its asset purchases, also said that additional stimulus is unavoidable if the central bank wants to retain its credibility.

While retail sales rose for a fourth straight month in July, industrial output and household spending unexpectedly declined and the BOJ's main inflation gauge slipped to zero per cent for a third time this year.

There have also been signs of weakness in inflation expectations. BLOOMBERG, REUTERS