MNI INSIGHT: BOJ Eyes Upbeat Sentiment As Important For Q4 GDP

Bank of Japan officials are focused on whether a surge in consumer sentiment can partially turn the tide of weaker exports, consumer spending and manufacturing production for a fourth quarter GDP rebound after a sharper than expected third quarter contraction, MNI understands.

Bank officials are particularly looking closer at private consumption after pandemic state of emergency measures were ended by the start of October and vaccination rates continue to show improvement.

In October, the BOJ upgraded its GDP forecast for the fiscal year starting April 2022 to +2.9% from +2.7%, but lowered its GDP views for this fiscal year.

VARIABLES TO GROWTH OUTLOOK

However, BOJ officials want to see if October consumer spending data due out later this month is buoyed by the rising sentiment, as the vaccinated elderly population has remained cautious on going out and supply constraints such as a shortage of semiconductors for automobile manufacturing are expected to continue to the end of the year.

But BOJ officials are upbeat about capital investment on new software purchases to address labor shortages and for R&D investment for growth areas like green energy. However, there is a risk that corporate profits are under pressure from high energy costs which could curb capital investment, see: MNI INSIGHT: BOJ Concerned Energy Costs Could Dampen Growth

As well, households face higher transport costs which has hit spending and the BOJ has warned of uncertainties over whether the resumption of economic activity can progress smoothly while public health is being protected.

Bank officials don't expect Japan's economy to return to pre-pandemic levels immediately, although the government has said the economy can return to pre-pandemic level as early as the first quarter of 2022.

Separately, on Monday, a senior official at the Cabinet Office said the economy faces downside risks in the fourth quarter from prolonged supply chain disruptions and private consumption is not expected to rebound in line with more upbeat sentiment on pandemic recovery.

Japan's economy posted the first contraction in two quarters in the July-September period, with the outlook for the fourth quarter more of a variable for the BOJ than the Cabinet Office view.