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BOJ will look past a service sector still struggling with social restrictions, leave policy unchanged
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The Bank of Japan will again point to a recovery in the second half of 2021, boosted by a roll out of the vaccine programme, although policymakers will use this week's Board meeting to highlight that the economy has been weaker-than-expected in recent weeks, with the ongoing health emergency weighing on the service sector of the economy.
Despite the ongoing state of emergency that keeps many social distancing measures in place, the BOJ will likely stand pat on monetary policy as its baseline recovery scenario remains intact
The outlook for household spending is expected to be lowered, as the face-to-face services sector, particularly in the hospitality industry, is likely to remain in the doldrums for the rest of Q2.
Although policy settings will remain on hold, the BOJ is set to extend its lending facilities supporting smaller firms, which is currently set to end on Sept. 30, and could move as early as the June meeting -- the government has already extended its zero rate, no collateral loans scheme by 6 months to the end of this year.
Bank economists expect auto makers to be hit by the shortage of semiconductors in May and June, putting downward pressure on production and exports, although the overall impact could be eased by solid demand for capital goods excluding transport equipment.
As the vaccine rollout picks up pace across Japan, private consumption is expected to recover at some point in H2, although BOJ economists see the recovery pace and strength are difficult to predict particularly how much pent-up demand is likely to flow through.
Outside the hospitality sector, many businesses in manufacturing and in some non-manufacturing firms, are already their fortunes recovering, the Bank's regional officers have noted..
Bank economists now await the upcoming June Tankan to gauge whether capital investment plans are revised revised up from March, as normally happens, to gauge whether a virtuous cycle is still in place in the corporate sector. Capex plans by major firms are expected to rise 3.0% this fiscal year, above the historical average.
If capex plans aren't revised higher, it will undermine the BOJ's baseline scenario, concerning bank officials that the could be a pause or a reversal to the virtuous cycle from income to spending.
However, overall bank officials expect capex to kick off a fresh cycle of growth, supported by improved corporate profits, accommodative financial conditions and an expected pick up in GDP growth rates. Weak revised capital investment in Japan's gross domestic product for the first quarter is overshadowing an optimistic view on capex held by bank officials, but the BOJ will not change its assessment before the release of the June Tankan survey.