MNI INSIGHT: Covid-19 Vaccine Rollout Pace Erodes BOJ Outlook

Uncertainty over the pace of the Covid-19 vaccine rollout in Japan has eroded the upside chances of a rebound in private consumption, almost two thirds of GDP, as the Bank of Japan weighs the path of recovery for next year, MNI understands.

The bank does see an uptrend in private consumption headed into the fiscal year starting April 2022 through pent-up demand for services. Both exports and capital spending are likely to remain firm, so the key is how private consumption recovers.

But the BOJ is not confident of an acceleration of vaccine rollouts that could bring strong upside risks on growth and prices (see: MNI BRIEF: BOJ Ups FY 21 CPI View But Lowers FY21 GDP - 16 July). The BOJ expects the impact of Covid-19 to gradually wane and subside in the middle of the projection period to March 2024 (see: MNI BRIEF: BOJ Board Member: Policy Post Covid Needs A Review - 21 July).

COVID RESURGENCE

Daily Covid-19 cases in Tokyo hit a record high on Wednesday, with 3,177 new infections, in a sign of a growing outbreak even as the Olympics take place in Tokyo and elsewhere in the country despite a state of emergency.

BOJ officials are concerned about the risks to the economy from increased Covid-19 cases, noting that even in advanced economies where vaccinations are making good progress, the spread of variants is destabilising the resumption of economic activity (see: MNI BRIEF: IMF Cuts Japan '21 GDP Outlook To +2.8% - 27 July).

They also see the possibility that downward pressure risks on Japan's economy will increase due to the spread of Covid-19 (see: MNI BRIEF: Economic Recovery Delay Risk On Covid-19: BOJ - 28 July).

STICKY INFLATION

But even with a faster recovery possible next year, BOJ officials don't expect inflation expectations to improve significantly as the entrenched mechanism of adaptive inflation expectations is complex and sticky in Japan.

Although economic growth above potential should boost the output gap and put upward pressure on prices, albeit with a lag of a few quarters, a flattening Phillips curve is still seen capping inflationary pressure for now as many firms fight shy of raising retail prices as wage growth remains weak (see: MNI POLICY: BOJ Worry Slower Recovery Will Hit Labour Market - 18 June).