Bank of Japan cuts growth forecast but sees recovery prospects

Central bank warns of uncertain outlook as pandemic weighs on service sector


The Bank of Japan on Thursday trimmed its economic and price forecasts for the current fiscal year but offered a more upbeat view on the recovery outlook, signalling that it has delivered enough stimulus for the time being.

The central bank, however, warned the outlook was highly uncertain as the pandemic weighs on service-sector spending and a resurgence of infections in Europe dampen prospects for a sustained global recovery.

As widely expected, the central bank kept monetary policy steady, including a -0.1 per cent target for short-term interest rates and a pledge to guide long-term rates around 0 per cent.

The BOJ also made no changes to a package of steps aimed at easing corporate funding strains, which has become its primary tool to deal with the pandemic-stricken economy. “The BOJ turned more optimistic about the outlook for economic activity today and will probably keep policy settings unchanged over the coming months,” said Marcel Thieliant, senior Japan economist at Capital Economics.

In a quarterly report on the outlook, the BOJ trimmed its growth forecast for the current fiscal year ending March 2021 to a 5.5 per cent contraction from a 4.7 per cent slump projected in July, reflecting sluggish service spending during the summer. It also downgraded this fiscal year’s core consumer price forecast to a 0.6 per cent fall from a 0.5 per cent drop seen in July. However, the BOJ revised up its forecast for the next fiscal year beginning in April 2021 to a 3.6 per cent increase, against a 3.3 per cent expansion seen in July. It also upgraded its assessment on exports and output to say they were “increasing.”

That compared with the view in July, when it said they were falling sharply. “Japan’s economy will likely improve as a trend as the impact of the coronavirus pandemic gradually subsides, though the pace of recovery will be moderate,” the report said. - Reuters