MNI POLICY: BOJ Lowers FY2020 GDP, Inflation Forecasts

The Bank of Japan board lowered its forecast for economic growth and inflation in the current fiscal year to March 31, following weaker capital investment and private consumption caused by Covid-19, the quarterly Outlook Report published Thursday showed.

But the board upgraded its forecast for real economic growth in fiscal 2021 and 2022, despite seeing that "risks to both economic activity and prices are skewed to the downside, mainly due to the impact of Covid-19."

The BOJ maintained its recovery scenario, saying, "the economy is projected to keep improving further with overseas economies returning to a steady growth path," but noted improvement could only be modest while Covid-19 remained a threat.

GDP AND CPI

The board's median forecast for gross domestic product in this fiscal year was revised to -5.5% from -4.7% made in July, with fiscal 2021 and 2022 revised up to +3.6% and +1.6%, up from July's forecast of +3.3% and +1.5% respectively.

The downward revision to GDP saw inflation forecast to fall to -0.6% from a previously forecast -0.5%. The forecast in fiscal 2021 was revised up to +0.4% from July's +0.3%, with 2022 left at +0.7%.

FINANCIAL SYSTEM, IMBALANCES

The BOJ's report said the "financial system has maintained stability on the whole and the smooth functioning of financial intermediation has been ensured. However, if Covid-19 has a larger impact than expected, there is a risk that deterioration in the real economy will affect financial system stability, thereby exerting further downward pressure on the real economy".

The report also warned that "the vulnerability of the financial system could increase, mainly due to the search for yield behavior," although noting risks are currently judged as not significant as financial institutions have sufficient capital bases -- but attention must be paid.