MNI POLICY: BOJ Cuts GDP Outlook; Infl'n View Little Unchanged

     TOKYO (MNI) - The Bank of Japan lowered its growth forecast for the fiscal

year to March 31 2021, citing weaker overseas economies, hit by Covid-19,

weighing on Japan's exports and production, the quarterly outlook report

released Wednesday showed.

     Inflation forecasts were left broadly unchanged from those three months

ago.

     The BOJ published median forecast for growth and inflation, having

published only a range of expectations in the April report, noting "risks to

both economic activity and prices are skewed to the downside, mainly due to the

impact of Covid-19."

     The BOJ continues to see a pick-up in coming months, saying, "the economy

is likely to improve gradually from the second half of this year with economic

activity resuming, but the pace is expected to be only moderate while the impact

of the Covid-19 remains worldwide."

     --GDP AND CPI

     The median forecast for gross domestic product in this fiscal year was

-4.7%, compared with a range of -5.0% to -3.0% made in April. For 2021 and 2022,

the outlook was +3.3% and +1.5%, compared with a range of +2.8% to +3.9% and a

range of +0.8% to +1.6% in April, respectively.

     Despite the downward revision to the GDP forecast, inflation forecasts were

large unchanged from three months ago.

     The median forecast for core inflation rate in this fiscal year was -0.5%,

compared with a range of -0.7% to -0.3% in April, then in fiscal 2021 and 2022,

+0.3% and +0.7% vs. a range of 0.0% to 0.7% and a range of +0.4% to +1.0% in

April.

     --ECONOMY

     The outlook is extremely unclear, since it could change depending on the

consequence of Covid-19 and the magnitude of their impact of domestic and

overseas economies, the report noted.

     It is based mainly on the assumptions that a second wave of Covid-19 will

not occur on a large scale and that, while the virus remains, firms' and

households' medium- to long-term growth expectations will not decline

substantially and the smooth functioning of financial intermediations will be

ensured with financial system stability maintained.

     --INFLATION EXPECTATIONS

     Inflation expectations have weakened recently, with the BOJ warning "it is

expected that prices of goods and services that are sensitive to economic

activity will be pushed down."

     "Medium- to long-term inflation expectations are likely to continue

weakening somewhat," the report said.

     The BOJ also warned, "If such expectations decline due to the shock caused

by Covid-19 that pushes down the economy considerably there is a risk that

firms' and households' appetite for spending will not increase easily even after

Covid-19 subsides."

     Although not high, there is a risk that the vulnerability of the financial

system could increase.

     "When examining financial imbalances form a longer-term perspective,

prolonged downward pressure on financial institutions' profits could create a

risk of a gradual pullback in financial intermediation," the outlook report

said.

--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

[TOPICS: MMJBJ$,M$A$$$,M$J$$$,MT$$$$]