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--Global Slowdown Main Concern For BOJ Policymakers
By Hiroshi Inoue
The Bank of Japan is set to keep monetary policy unchanged at its 2-day
meeting that ends Friday, despite signs of a strengthening global slowdown
impacting on the domestic economy.
Japan's exports and industrial production have both been hit by slowing
Chinese economy and the weaker-than-expected euro area economy, but the BOJ
still sees the domestic economy on a recovery path.
Although policymakers are unlikely to lower their overall assessment of the
economy, the sluggish data will prompt the board to consider adjusting their
assessment for exports and production, as the first quarter outturn will be
There are hopes China's stimulus moves will act as a tailwind for their
economy ahead, but it will not provide a quick boost for Japan's exports.
In the light of slower global demand, Japan's economy is expected to slow
somewhat in the first quarter from the revised 0.5% q/q Q4 growth reported next
week, with BOJ officials focused on whether domestic demand holds up.
How slowing output and export demand hits capital expenditure and the
subsequent flow-through to corporate profits and spending will remain key to BOJ
thinking when assessing the outlook.
BOJ officials expect the pace of increase in capital investment to
slow-moving forward. An early indication will be seen when the March BOJ Tankan
survey is published on April 1, although a clearer view of spending plans will
show up in the revised June Tankan spending plans.
Despite reservations over the accuracy of the initial Capex plans laid out
in the March survey, BOJ officials will take note of how the early indications
for fiscal 2019 deviate from historical averages.
If the Tankan does show weaker investment plans, around 10% lower than
those seen a year ago, the Bank will have increased concerns over the mechanisms
it sees driving the overall recovery.
BOJ officials remain perplexed by current sluggish inflation rates and the
weak outlook for prices, as the continued tightness of the labor market and the
improved economy has had little impact.
Looking ahead, they warn downward pressure stemming from the drop in crude
oil prices could push core CPI to near zero percent over the summer months,
lowering the inflation expectations, although April hikes in food and beverage
prices could help underpin the upside.
Reduced volatility in financial markets over recent months is a bright spot
for the BOJ, giving it some protection from an early downgrade of the overall
economic assessment and concerns of a sharper downturn.
But a return to the weakness seen in global markets around the turn of the
year will quickly worsen both corporate and household sentiment, impede spending
and impact the BOJ's much vaunted virtuous cycle.
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