MNI INSIGHT: BOJ Turns Focus To Q4 For Economic Rebound Signs

Downside risks to Japan's economy have heightened in Q3, and the Bank of Japan has turned its focus to rebound signals for Q4 in higher vaccination rates and private consumption, and an easing of semiconductor and auto part shortages, MNI understands.

Bank officials expect the economy in the third quarter to be largely flat or post negative growth from Q2 in the wake of an extended and expanded state of emergency and the industrial supply restrictions. But they don't expect the economy to fall into a negative spiral, see: MNI INSIGHT: BOJ Watching Auto Part, Semiconductor Shortages.

The economy expanded an upward revised 0.5% q/q, or an annualized +1.9%, in Q2 in data released on Wednesday. As for private consumption, the Q2 GDP data did not show real conditions and was overestimated by a weak deflator.

HEADWINDS ON SERVICES

Japan's economy, especially eating and drinking services and accommodations, continues to be hit hard by the state of emergency to Sept. 12 in the wake of the Covid-19 outbreak. The government is considering extending the state of emergency.

In response, bank officials at the Sept. 21-22 policy-setting meeting are expected to tweak or lower the near-term view that exports and production will increase steadily in Q3. However, they will maintain the view that exports and production are likely to pick up later this year on the back of recovering global economy.

Bank officials, however, are paying great attention to how the Delta variants evolve around the globe and affect private demand. On Tuesday, the Reserve Bank of Australia signalled that extended lockdowns were taking a near-term toll on the economy.

ELECTION AHEAD

An election in Japan for the lower house of parliament is likely to be held on Oct. 17, with a contest in the meantime to replace Prime Minister Yoshihide Suga as president of the ruling Liberal Democratic Party.

"When the coalition party holds the [legislative] majority, there is no room for the BOJ to change its policy framework," said Kazuo Momma, now executive economist at Mizuho Research and Technologies and a former BOJ executive director, see: MNI INTERVIEW: BOJ To Hold Course As Japanese PM Suga Goes.