TOKYO (MNI) – The Bank of Japan on Friday downgraded its assessment
of Japan’s economy from the previous month, warning of strong downward
pressure from production side on the economy after the devastating March
11 earthquake and tsunami.
“Japan’s economy is under strong downward pressure, mainly on the
production side, due to the effects of the earthquake disaster,” the BOJ
said in its monthly economic report for April.
“The earthquake has sharply dampened production in some areas by
damaging production facilities, disrupting supply chains, and
constraining electric power supply; exports and domestic private demand
have been affected accordingly,” it added.
In March, the BOJ was upbeat about the economic outlook: “Japan’s
economy is emerging from the current deceleration phase.”
The BOJ also downgrade its assessment of the outlook for the
economy.
“Japan’s economy is likely to remain under strong downward
pressure, mainly on the production side, for the time being,” the BOJ
warned, echoing the statement released by the BOJ board meeting on
Thursday.
But the policymakers haven’t abandoned their baseline economic
scenario, saying that Japan’s economy “is expected to return to a
moderate recovery path — as supply-side constrains are mitigated and
production regains traction — backed by an increase in exports
reflecting the improvement in overseas economic conditions and by a rise
in demand for restoring capital stock.”
The BOJ, however, did not give a specific timeframe for a return to
a gradual recovery.
Back in March, the BOJ had simply said: “Japan’s economy is
expected to return to a moderate recovery path.”
As a result of the downward revision to its core economic
assessment, the BOJ also modified the assessments of major economic
components, including exports, production, capital investment and
private consumption.
“Production is expected to remain at a low level for the time
being, but is likely to start increasing as supply-side constrains are
mitigated,” the April report said.
“In this case, exports are expected to turn upward, reflecting the
improvement in overseas economic conditions,” it also said.
Private economists expect that industrial production fell nearly
10% in March from the previous month.
This would surpass the 8.6% fall recorded in February 2009 — the
second largest single-month drop after the Lehman shock in September
2008 — raising concerns about a prolonged slowdown in the domestic
economy.
In March, the BOJ said “exports and production are showing signs of
resuming their uptrend.”
The BOJ was mildly optimistic in its April report about the outlook
for investment, due largely to the need for reconstruction spending
after the earthquake. “Business fixed investment, housing investment,
and public investment are also expected to increase gradually, mainly
due to growing demand for restoring capital stock.”
In March, the BOJ had said: “Business fixed investment is picking
up.”
In the new report, the BOJ said “private consumption is expected
to pick up as production begins to recover.”
As for inflation, the BOJ mostly maintained the view presented
in March, saying: “The year-on-year rate of change in the CPI is
expected to become slightly positive in the near future.”
But the BOJ warned, “The year-on-year rate of change in the CPI is
likely to be revised downward with the base-year change scheduled for
August 2011.”
The report’s sentence describing financial conditions was
downgraded slightly from the previous month due to the earthquake.
“Financial conditions have generally continued to ease, while
weakness has been observed in the financial positions of some firms,
mainly small ones, since the earthquake,” the latest report said.
But it also noted, “the new issuance of bonds has been at a pause
amid somewhat wider credit spreads on corporate bonds, whereas the
issuing conditions for CP have continued to be favorable.”
“Some firms have recently shown signs of increasing their demand
for working capital as well as accumulation their on-hand liquidity,”
the April report said.
At a two-day policy setting meeting ended on Thursday afternoon,
the BOJ’s policy board voted unanimously to continue the bank’s very
stimulative, practically zero interest rate policy by maintaining the
target for the overnight call loan rate among commercial banks in a
range of zero to 0.1%.
To counter the drag from the March 11 earthquake disaster, the
board also decided by a unanimous vote to create a new funding tool that
will allow the central bank to provide loans to financial institutions
in northeastern Japan that were hit hardest by the earthquake and
tsunami at a super low interest rate of 0.1%.
The BOJ will extend one-year loans to financial institutions at a
fixed rate of 0.1% to lend out to businesses adversely affected by the
earthquake. The financial institutions can roll over maturing BOJ loans
for one additional year.
BOJ Governor Masaaki Shirakawa said Thursday that supply
constraints are the immediate economic challenge facing Japan in the
wake of the March 11 earthquake, unlike the sudden plunge in demand seen
during the recession of the global financial crisis.
He also told a news conference that the level of uncertainty over
Japan’s growth prospects and recovery from years of deflation is as high
as the policy board anticipated at its last meeting on March 14.
The BOJ will hold its quarterly branch managers’ meeting on Monday
at the headquarters in Tokyo.
tokyo@marketnews.com
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