MNI INSIGHT: BOJ To Mull Economy Recovery View At April Meet

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is unlikely to react to the coronavirus

outbreak when it meets in March, but officials will look to the April meeting to

see if there is a need to revise its current baseline recovery scenario, MNI

understands.

     Bank officials still believe the global economy will pick up, although the

recovery is likely to come later than the initially seen timing of around

mid-2020, as the virus will weigh on growth at least through Q1. Any sign of a

sharp slowdown of corporate activity in the March Tankan survey would almost

certainly prompt the BOJ to downgrade its assessment.

     With very little Q2 data available at the time of the April meeting, BOJ

officials hope the coronavirus outlook will at least be clearer by then.

     --SENTIMENT DIP

     The March Tankan business sentiment survey will be released on April 1 and

the BOJ will hold its quarterly branch managers' meeting mid-month, both before

the meeting at the end of the month.

     Among the BOJ's worries is that a fall in corporate sentiment will lead to

an easing in the tight labour markets, which could lower the upward pressure on

wages, currently a main driver in momentum to higher prices, although an early

easing of conditions isn't expected as structural issues still remain.

     The tighter labour markets have helped create a positive output gap,

another driver to higher prices.

     Should that gap continue to narrow, it would force the BOJ to revise, even

abandon, its main recovery scenario.

     --OUTPUT GAP

     The BOJ also expects business sentiment among non-manufacturers to fall on

continued sluggish private consumption after the tax hike and the plunge in

Chinese tourists in Japan. 

     A dip in sentiment at manufacturing and non-manufacturing firms will

further ease pressures in the labour market, pushing the output gap lower.

     The BOJ believes the recent narrowing of the positive output gap was

largely a reflection of the slowdown in overseas economies and the sales tax

hike and will likely pick up as the economy recovers.

     Japan's estimated positive output gap narrowed to 1.02 percentage points in

Q3 as supply tightened and demand firmed, down from 1.03pp in Q3. It was the

12th straight quarter with a positive output gap, which should increase pressure

on both consumer prices and inflation expectations, albeit with a lag of a few

quarters.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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