Japan’s central bank is expected to cut its economic and price forecasts for next fiscal year at a quarterly review in April, sources familiar with its thinking say, as weak global demand hits growth and yen rises weigh on imported fuel costs.
The gloomy assessment comes even after the Bank of Japan (BOJ) attempted to forestall risks of an economic downturn by adopting negative interest rates in January, underscoring the fragile nature of Japan’s recovery.
A change in the BOJ’s baseline expectations for the fiscal year ending March 2017 may prompt the central bank to offer a bleaker view on exports, output and the economy when its board meets next week than it did in January.
While many BOJ officials remain optimistic about domestic demand, some fret the global market turbulence and sluggish emerging market demand are taking a heavier than expected toll on exports and factory output.
“Risks are clearly tilted toward the downside both in terms of the economy and prices,” said one of the sources, a view echoed by two other officials familiar with the BOJ’s thinking.
Pessimists in the BOJ warn that if market turbulence persists, the bank’s baseline expectation of a moderate economic recovery could come under threat.
Reflecting weak external demand, the board members may also cut their growth and price projections at a quarterly review to be conducted at a more critical policy meeting on April 27-28, the sources said.
A rise in the yen, which is now around 115 to the dollar compared with 120 in January, will also weigh on inflation by pushing down the cost of imported goods and fuel, they said.
Under its forecasts made in January, the BOJ expects the economy to expand 1.5 percent and core consumer inflation to hit 0.8 percent in the coming year beginning in April.
Revised GDP data due out Tuesday is likely to show Japan’s economy contracted slightly more than initially estimated in the final quarter of 2015, keeping the BOJ under pressure to deploy additional monetary stimulus.
But BOJ Governor Haruhiko Kuroda maintained his optimism on Japan’s economic recovery on Monday and said now was the time to scrutinize the effect of the January easing on the economy, dispelling speculation of immediate easing.
In January, the BOJ said Japan’s economy continues to recover moderately and while output was moving sideways, exports were picking up albeit with some weaknesses.