MNI INSIGHT: BOJ Eyes Return To Pre-Covid GDP Levels Around Q3

Bank of Japan officials are cautious on the chances for an economic rebound to pre-Covid-19 levels in or around the third quarter but note sharper economic gains into the second half of the year could set the stage for a change in forward policy guidance, MNI understands.

Japan's growth rates lag the U.S. and eurozone in a return to pre-pandemic levels, but with tourism opening in a phased manner in June and continued easy policy could the BOJ could be prompted to tweak or remove the wording “closely monitoring the impact of Covid-19” in the forward guidance for policy rates.

Real GDP for the January-March quarter exceeded the pre-pandemic level (or the 2019 level) by 3.7% for the United States and by 0.6% for the eurozone, respectively. But real GDP for Japan remained 2.7% below the pre-pandemic level. An update for Japan's January-March quarter GDP is due on June 8, and expected to show the economy contracted slightly more than the initial estimate.

Earlier this month, MNI reported the BOJ could look at the language in its June or July policy reviews, (See MNI BRIEF: BOJ May Soon Remove “Covid-19 Impact” From Guidance). In July, the BOJ upgrades its medium-term economic growth and inflation view in the quarterly Outlook Report.

The BOJ has been consistent however that changes to current easy policy are not on the cards until there are sustained price gains driven by higher wages and consumer acceptance of higher costs.

NEAR-TERM FACTORS

BOJ officials are tentative on the pace of corporate financing for capex spending as the economy emerges from pandemic conditions as parts shortages in the automobile industry and the pace of recovery in China from lockdowns, remain key factors for changes to forward guidance, (See MNI INSIGHT: Weak Corporate Spend A BOJ Virtuous Cycle Concern)

BOJ economists are also examining whether weak real export index for April (-6.0% m/m) and industrial production for April (-1.3% m/m) are caused by temporary supply-side restraints, not caused by weak global demand.

The economy in the second quarter is seen to be supported by a domestic demand recovery. But whether that extends to household goods and big-ticket purchases like automobiles is a question. Still, a strong recovery would carry into the third quarter and likely see travel, dining, and other services strongly pickup if pandemic conditions remain at bay.