BOJ chief economist optimistic about Japan's short-term outlook

Tokyo

THE chief economist of the Bank of Japan (BOJ) on Monday offered an upbeat assessment of the short-term prospects for the world's third-largest economy, echoing the optimism expressed by BOJ governor Haruhiko Kuroda in an interview with The Business Times in the Azerbaijan capital of Baku earlier this month.

Eiji Maeda suggested that Japan could continue exceeding its potential growth rate as household spending and consumer sentiment improved.

"The output gap has returned to its 10-year average and could rise above the average," he said, adding that the economy should "move from a recovery to an expansionary phase".

He argued that, by some measures, retail sales had recently shown signs of strength and that the housing market was starting to pick up.

Falling oil prices will also shave more than 10 trillion yen (S$11.04 billion) off Japan's energy import bill, which is larger than an eight trillion yen hit inflicted by a sales tax increase last year, he added.

Japan's economic performance has been mixed in recent months, but data on Monday showed that core machinery orders grew in March for the first time in two months and more quickly than expected.

First-quarter gross domestic product (GDP) figures due on Wednesday are expected to show a modest 0.4 per cent real growth in the period.

Market expectations are weighted towards the view that the BOJ will stand pat on its current monetary policy. But Mr Kuroda has in the past shown willingness to deliver surprises, and some form of further easing at this point could bolster economic growth and inflation expectations, some economists say.

Such a surprise move could also push share prices convincingly back above the 15-year high, to which they climbed recently before sliding back again somewhat. This could, in turn, trigger a much-needed expansion of personal consumption, they say.

But the strongest argument in favour of further easing by the BOJ on Friday is that Prime Minister Shinzo Abe's government last week agreed to reinforce the country's economic growth as a priority, in order to reduce the government's massive fiscal deficit, a priority that Mr Kuroda also favours.

In his interview with BT in Baku, Mr Kuroda said: "We expect this fiscal year that real GDP growth will be around 2 per cent, and in fiscal 2016, around 1.5 per cent.

"Those rates will be well above Japan's potential growth rate, which is less than one per cent at this stage. That means the output gap will continue to shrink and could become positive, thereby raising prices and wages."

He also pointed out that the BOJ's projection of economic growth was about 2 per cent for this fiscal year ending March 31, 2016, and 1.5 per cent next year. Meanwhile, the BOJ projects that inflation will come in at around 0.8 per cent this year and 2 per cent next year, he added.

Mr Kuroda later told Parliament that economic growth was "turning positive", and that downward pressure on prices will have disappeared from April.

He acknowledged that the effect of last year's national consumption tax hike had been "bigger than expected", but added that the slack in the economy had mostly disappeared, and that the economy was responding positively to the central bank's monetary-easing programme.

Meanwhile, the outlook for core machinery orders remains clouded, analysts said, after Monday's data was published.

Companies surveyed by the Cabinet Office forecast that core orders, which exclude those of ships and electric power utilities, would fall by 7.4 per cent in the current quarter.

Kenta Ishizu, market economist at Mizuho Securities in Tokyo, was reported by Reuters as saying: "Japanese firms are not in a situation where they can accelerate capital spending, given the slowdown in the Chinese and US economies and sluggish private consumption due to tame wages."