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By Hiroshi Inoue
     TOKYO (MNI) - The Bank of Japan expects the domestic economy to bottom out
in the second quarter of 2019 then returning to a recovery path in the second
half, giving policymakers latitude to leave policy unchanged as they take a
wait-and-see approach, MNI understands.
     China's sluggish economy, a drag on Japan's exports and production in
recent months, is seen picking up following Beijing's stimulus efforts, allowing
the BOJ stand pat -- unless global financial markets destabilize sharply and the
yen strengthens.
     Conditions for manufacturing exporters will likely remain weak, while
domestic-facing non-manufacturers will see solid demand, underpinning the
virtuous cycle from profits to spending, bank officials believe, expecting tight
labour markets to have a greater impact on home markets than global demand.
     BOJ officials aren't filled with optimism for the outlook, however, with
continued downside risks from overseas, including Brexit, global trade disputes,
Brexit and the sluggish eurozone economy.
     Recent data from China, particularly the March PMI surveys, point to a
bottoming out of the economy as stimulus measures kick in. BOJ officials,
however, await further data to confirm any recovery.
     The International Monetary Fund's World Economic Outlook, published
Tuesday, sees global growth at 3.3% in 2019 and 3.6% in 2020, with the BOJ using
those numbers as a platform for their GDP forecasts, although they will lean
towards the higher 2020 outlook.
     At home, the BOJ's latest forecast, published in January, sees real GDP
growth of 0.9% FY2019, revised lower from October's forecast of growth around
1.4%, but within the 0.5-1.0% potential growth rate range estimated by the
central bank.
     Growth above potential will produce a positive output gap, helping keep
upward pressure on the inflation rate.
     Japan's estimated positive output gap widened to 2.23 percentage points in
the October-December quarter, up from 1.26 percentage points in Q3, the BOJ has
said, giving nine straight positive quarters of which should increase pressure
on consumer prices and inflation expectations, albeit with a lag of a few
     Looking ahead, BOJ economists will focus on March trade and industrial
production data for any signs of a pick-up in demand from overseas.
     Industrial output is a key piece of data for BOJ economists to assess and
predict the pace of the current modest economic recovery and the outlook for
economic activity as it reflects both external and domestic demand.
--MNI London Bureau; tel: +44 203-586-2225; email:
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: