MNI INSIGHT: BOJ See Q2 Econ Bottom; Return To Recovery Path

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.

     --SOLID DOMESTIC DEMAND

     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.

     --OUTPUT GAP

     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

quarters.

     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: les.commons@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

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