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The Bank of Japan board will likely stand pat on monetary policy at its upcoming policy-setting meeting as the economy hasn't deviated from October's baseline scenario but the focus will shift to the possible fallout from the second emergency and could darken the outlook, MNI understands.
Policymakers are increasingly worried that the negative impact on the economy and sentiment may expand, especially if the coronavirus emergency is extended beyond Feb 7.
BOJ officials don't rule out the possibility of a contraction in real economic growth for the first quarter due to weaker private consumption.
The board will review the medium-term economic growth and inflation rate forecast and may consider lowering its economic assessment from the latest at the two-day meeting ending Jan. 21
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The median forecast for the inflation rate in fiscal 2021 is expected to be revised down from +0.4% made in October but it will not result in additional easing as the bank has prioritised providing liquidity and stabilising markets.
Board members expect that in the next fiscal year starting April 1, the economic boost from the government's stimulus measures will be tempered by weaker conditions caused by the covid emergency.
Bank officials expect in-person services will be hit hard while manufacturing remains solid on the back of firm demand for goods. However, they don't expect the labour market to worsen sharply due to the government's subsidies.
Prime Minister Yoshihide Suga on Wednesday expanded the state of emergency to Osaka, Kyoto, Hyogo, Aichi, Gifu, Tochigi and Fukuoka, making the order effective in 11 of the nation's 47 prefectures.
The emergency may be extended beyond Feb. 7 if the rate of infections doesn't fall significantly.