MNI INSIGHT: BOJ To Strengthen Guidance If No Economy Pick Up

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan will consider lengthening the calendar

duration of its forward guidance on policy rates beyond "at least through spring

2020" if the economy doesn't pick up by the second half of this year, MNI

understands.

     As the global economy slowed on the back of a sluggish China economy,

Japan's exports and industrial production, major engines for a sustainable

economic recovery, remained weak in Q1 and BOJ economists will look closely this

quarter for a recovery.

     With downside risks acknowledged for the rest of this year and current easy

policy in place at least through Q1 2020, the central bank must also judge the

impact of the planned October consumption tax hike on consumer spending, which

will only become fully apparent in Q1 2020.

     BOJ officials think the BOJ's current guidance is appropriate, as they base

it on the International Monetary Fund's view that Japan's economy is expected to

gain the momentum in or after mid-2019.

     However, China's economy, which was showing early signs of a pick up, could

be hit by a worsening of the trade dispute with the U.S. and that will throw a

shadow over a global economic recovery, dampening further Japan's exports.

     Japan's share of exports in world trade has decline recently, due in part

to a decrease in demand capital goods, with shipments for the January-March

period falling 7.6% on quarter, although BOJ analysis suggests the drop can be

explained almost entirely by the negative contribution of Asia-specific factors.

     --ADJUSTMENT MAY HIT BOTTOM

     IT-related exports have also slowed, although the BOJ believes the current

adjustment phase, beginning in Q218, may hit bottom in the second half of this

year. This is based on its analysis that past trends show cycle adjustments take

an average of 5-6 quarters to complete.

     At the April 24-25 meeting, the BOJ clarified its forward guidance for

policy rates, clarifying it will patiently maintain easy policy as it will take

an extended time to achieve the 2% price target. Continued heightened

uncertainties over the global economy were a further factor in its thinking.

     The BOJ said it intends to maintain the current extremely low levels of

short- and long-term interest rates for an extended period of time, "at least

through around spring 2020," taking into account uncertainties regarding

economic activity and prices including developments in overseas economies and

the effects of the scheduled consumption tax hike. Governor Haruhiko Kuroda said

that low rates would remain in place for quite a long time beyond the announced

spring 2020 period.

--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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