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Bank of Japan officials see the near-term economy as weaker than their view in April due to weaker private consumption caused by the extended state of emergency and supply-side restrictions caused by semiconductor shortages, MNI understands.
But bank officials see no need to change the baseline recovery scenario as they expect the economy to recover in or after the third quarter, thanks to the vaccine rollout and recovering global demand.
A virtuous cycle from income to spending that the BOJ cited in April is continuing, although gross domestic product for the first quarter showed weak capital investment, according to the BOJ view.
The BOJ will likely downgrade its assessment on private consumption made in April at its two-day policy meeting ending on June 18 as face-to-face services are further hit by the state of emergency.
Face-to-face services remain weak but the deteriorating performance did not filter through to other businesses, and manufacturers and some non-manufacturers are broadly recovering.
Bank officials expect private consumption, which will fall in the second quarter, to gradually pick up in or after the third quarter due to the spread of vaccinations.
As for private consumption, the BOJ sees a gradual recovery as older people in Japan are more cautious about going out than those in the U.S. and Europe.
But the BOJ is not ruling out upside risk, given that private consumption had picked up swiftly before herd immunity was broadly established overseas.
Exports of automobiles are expected to fall in May and June as automobile makers which are strongly hit by the shortage of semiconductors reduce their production, according to the BOJ view.
But Japan's exports are unlikely to fall significantly as demand for capital goods, excluding transport equipment, and for IT-related goods remains solid in the U.S., China and other Asian countries.