MNI STATE OF PLAY: BOJ To Cut GDP, CPI FY21 Views, Hold Policy

Inflation and growth forecasts for this fiscal year will be cut by the Bank of Japan at its end-October policy meeting as signalled, while overall interest rates and asset purchases will hold steady, MNI understands.

GDP growth for the year ending March 31, will fall from a +3.8% forecast in July as lockdowns to curb the Delta variant hit the economy over the summer and into the fall and consumer prices will ease on a new base year and lower mobile phone charges, see: MNI INSIGHT: Lingering Supply Chain Gaps Can Alter BOJ Views.

The BOJ will hold its two-day policy-setting meeting on Oct. 27-28 and release its quarterly Outlook Report.

ECONOMIC OUTLOOK

The bank will likely maintain the view that Japan's economy has picked up as a trend as bank officials still see slowing exports and production caused by supply chain disruptions for the automobile industry as temporary, but also as prolonged and cascaded to affiliated manufacturers.

BOJ officials still expect a virtuous cycle from profits to spending as a main pillar of supporting economic recovery, but they are worried that economies overseas are recovering at a slower pace and that could further lower Japan's exports.

Japanese exports have been driven by economic growth in China and U.S., but exports and production are losing momentum due to a drop in automobile production.

TANKAN, VACCINATIONS

But a better-than-expected BOJ Tankan reading in September, solid vaccination rates and rebounds for restaurants and domestic travel expected after lockdowns were eased at the end of September are favourable for the economy.

BOJ economists however are concerned that corporate profits are under downward pressure because of high costs for imported energy, leaving less cash available for capex investment and hitting household spending, along with a slightly weaker yen at a time of weaker exports and higher import costs.