MNI PREVIEW: BOJ To Hold; May Cut GDP View On Weaker Spending

The Bank of Japan is expected to stand pat on monetary policy at its two-day policy meeting ending Oct. 29 since the economy is recovering gradually as it expected but the bank may lower its median growth forecast for this fiscal year as private spending and capital investment remain weak.

In July, the bank forecast the economy to contract 4.7% this fiscal year.

Subsequent data showed Japan's economy shrank an annualised 28.1% in the April-June period as businesses scaled back investment in the face of uncertainty and personal consumption declined due to covid-19 restrictions.

Board members are mostly of the view that the economy bottomed out in the second quarter but BOJ economists are watching activity in the non-manufacturing sector, mainly in the hospitality industry, which has taken the hardest hit from the coronavirus, for its impact on the broader economy.

LOWER PRICES

A weaker growth forecast would allow the board to consider lowering the median inflation forecast from July's -0.4%. The bank already expects the key inflation rate to be negative for the time being.

The nationwide core CPI, excluding perishables, fell 0.4% y/y in August for the first drop in three months after being unchanged in July and June. August's decline was the lowest since May 2013 when it also fell 0.4%.

The board largely judges that lending facilities are producing the intended effect, but policymakers are keeping a close eye on financing developments among non-manufacturing companies.

Businesses seem to have ensured enough liquidity beyond this year although bank officials are vigilant about solvency issues amid poor profits and sales at some businesses.

The BOJ has prioritised facilitating corporate financing and maintaining the stability of financial markets to avoid a negative feedback loop.

The bank's focus has shifted to the pace of recovery in 2021 as economic activity, including private spending, will continue to be strongly influenced by developments related to the Covid-19 pandemic.