MNI INTERVIEW: Tankan To Flag Services Recovery: Ex-BOJ Aide

Japan's June Tankan business sentiment survey, due out on Thursday, will show a clearer picture of the current K-shaped economic recovery, although the difference between the manufacturing and service sectors is likely to be shown narrowing three months ahead, a former Bank of Japan executive director and chief economist told MNI on Tuesday.

"The K-shaped recovery will be apparent in the Tankan survey as manufacturers remain solid and face-to-face services remained weak," Hideo Hayakawa, now senior fellow at the Tokyo Foundation for Policy Research, said in an interview.

However, Hayakawa added that the Tankan will show the K-shaped path for the economy will now peak and the difference between the sectors will reduce three months ahead as the vaccination program rolls out and services rapidly recover. The elderly and high-income households, whose spending has been constrained due to the loss of opportunity during the pandemic, will see a sharp boost in their spending as vaccinations spread, he added.

LITTLE YEN EFFECT

Looking at the currency, Hayakawa also said he saw neither a positive or negative directional impact either way from the current yen level on the economy.

"The yen's current fall isn't a big deal and it is unlikely that it will fall to a level to warrant policy action," Hayakawa said.

He added that the current yen's level will still contribute to boosting exporters' profits, but it will not cause a sharp increase of exports as the recovery over the last year was mainly on the back of strong global demand, not currency fluctuations.

Japanese policymakers hope the yen will not break below JPY100, so a range of between JPY100 and JPY120 is regarded as appropriate, he said.

INFLATION

As for inflation rate, Hayakawa said prices "are being influenced by (high) crude oil price and (low) mobile phone charges but the underlying trend of price is little changed. Compared with the big negative output gap, prices are steady."

He warned that global financial markets will see some volatility ahead as they deal with incoming U.S. economic data and communications by the U.S. Federal Reserve. Financial markets were slightly confused by earlier-than-expected rate hike message from the Fed, he said.

"The focus is whether the Fed continues to highlight a transitory price move. I'm wondering whether the Fed has perfect confidence in its price assessment. This is because nobody can predict future data as the economic cycle is different from past ones and the experimental rule doesn't obtain at all," Hayakawa said.