Japan's Q3 growth forecast slashed on Covid-19 surge: poll

[TOKYO] Japan's economy will grow this quarter at a much slower pace than previously expected as a resurgence in coronavirus infections is hurting the momentum for a recovery, a Reuters poll found.

But analysts forecast growth to speed up toward the year-end as hopes of a spending pickup amid a widening vaccine rollout will allow the economy to shake off the pandemic drag.

The economy was expected to grow an annualised 2.7 per cent in the July-September quarter, according to the Aug 2-11 poll of around 40 economists. That was much lower than a 4.2 per cent expansion projected last month and 4.8 per cent growth forecast in June.

The government will release a preliminary gross domestic product growth estimate for April-June on Monday, which analysts expected to come in at an annualised 0.5 per cent. That was up a notch from an annualised 0.4 per cent forecast last month, though the quarter-on-quarter growth forecast still came in unchanged at 0.1 per cent.

A spike in Delta variant cases forced Japan to expand its Covid-19 emergency curbs during the Tokyo Olympic Games, as a record surge in cases strained hospitals in parts of the country and the health crisis weighed on spending by households.

"A delay in the recovery of private consumption, especially centred on the service industry, poses a downside risk to the economy," said Barclays Securities economist Kazuma Maeda.

Japan's economy shrank an annualised 3.9 per cent in the first quarter and its recovery has lagged other advanced nations as a late vaccine rollout and lacklustre spending on services undermined the momentum.

Over 80 per cent of analysts polled said the likelihood was high that new Covid-19 variants and the recent Covid-19 infection spike would delay the country's economic recovery, with most of them expecting a delay of about three months.

"Surely the record number of cases will result in additional consumer caution and force the government to keep restrictions in place for longer," said Marcel Thieliant, a senior economist at Capital Economics.

The median poll forecast showed economic growth would accelerate to an annualised 5.4 per cent in October-December and come in at 3.2 per cent in the first three months of the next year, up from 4.6 per cent and 2.7 per cent, respectively, projected last month.

A forecast for the current fiscal year was cut to 3.5 per cent growth from 3.6 per cent expected previously, while that of next fiscal year was raised to 2.7 per cent from 2.6 per cent.

Core consumer prices, which exclude volatile fresh food prices, are expected to grow only 0.3 per cent this fiscal year, unchanged from last month, the poll showed.

Respondents were unanimous in saying the Bank of Japan (BOJ) would hold its short-term interest rate target at -0.1 per cent and the 10-year bond yield target around 0 per cent at its policy meeting on September 21-22.

Almost 90 per cent of analysts in the poll expected the BOJ to unwind its ultra-easy monetary policy when it makes its next move, though they were divided about what the central bank would do if it were to eventually tighten its policy framework.

Most widely expected options were for the BOJ to adjust its forward guidance, raise the 10-year yield target, or do away with its negative rate policy and lift short-term interest rates, the poll showed, unchanged from last month.

REUTERS