MNI POLICY: Covid-19 To Lower Growth, Infla Expectations

--BOJ Concerned Falling Expectations To Weigh On Potential Growth

By Hiroshi Inoue

     TOKYO (MNI) - Falling growth and inflation expectations are becoming a

growing concern from the Bank of Japan, with some Board members already seeing

the risk that the economy could fall into deflation, emphasizing the need for

measures to combat at as recently as the June meeting.

     The BOJ still believes preventing firms from bankruptcy will still be the

best way to protect employment and maintain stability in the financial system

will contribute to preventing growth expectations from falling as the BOJ

doesn't have any other effective tools. However, how to stop expectations

falling further will likely occupy much discussion as policymakers gather for

the July meeting, MNI understands.

     Weakness in the services sector remains the greatest risk to downward

pressure on growth expectations, particularly from the hospitality sector that

has been badly hit by the virus, with the lowered growth outlook in the sector

pushing medium- and longer-term inflation expectations lower.

     --SLUGGISH RECOVERY

     With little hope for a rapid recovery in the sector as social distancing

and travel restrictions remain in place, there is a concern the downward

expectations could be in place for some time.

     There are some bright spots for the BOJ to hold onto. The spread of the

pandemic and measures to overcome it are pushing firms to adapt, with increased

digitalization and off-site working likely to offer some upside support to

Japan's potential growth rate, but the BOJ doesn't expect it to be enough to

replace the lost potential from the weakening service sector.

     Corporate short-term inflation expectations fell as crude oil prices dipped

early in the Covid-19 crisis, but medium- to long-term inflation expectations

have held steady, helped by firms' appetite to to push on with capital

investment.

     --CONCERN OVER DEFLATION

     Japan's potential growth rate for the October-March 2020 period was

estimated at 0.13%, down from 0.21% for the six months through September 2019,

the BOJ has said.

     The inflation outlook among Japanese companies fell from three months ago,

indicating an expectation consumer prices will remain muted, the BOJ's June

Tankan survey showed. Firms on average see annual CPI at 0.3% a year from now,

down from 0.5% in March, a 0.7% rise three years out and a 0.9% rise five years

ahead, both down from +0.8% and +1.0%, respectively in March.

--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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