TOKYO (MNI) – Economists have revised down their forecasts for
economic growth for this year and next and pushed back the timing for a
projected recovery from deflation, according to the latest monthly
survey by the Cabinet Office’s Economic Planning Association released on
Wednesday.

The survey also showed that the number of the economists who expect
the Bank of Japan to ease credit further jumped to 20 from 7 in the
previous survey.

Meanwhile, the number of the economists who expect the BOJ to
tighten its credit grip slumped to 21 from 34 in the last survey.

The survey showed that economists now expect the year-on-year
change in core consumer prices to remain clearly in negative territory
through the end of fiscal 2011, meaning that Japan will post three years
of continued price drops.

The average economist forecast for the core CPI (excluding fresh
food) for fiscal 2011 ending March 31, 2012 was -0.12% y/y, revised down
from their previous forecast of -0.06%.

It is much weaker than the latest median projection by the BOJ
policy board at +0.1% for the next fiscal year.

The association polled 43 economists and research institutions from
Aug. 25 to Sept. 1 for its ESP Forecast, and 42 answered on the growth
and inflation outlook and 41 on the BOJ’s monetary policy stance.

On Aug. 30, the BOJ eased credit slightly by expanding its
low-interest funding program for banks at an extraordinary
policy-setting meeting in light of growing fears that the strong yen and
weak share prices will hurt Japan’s modest economic recovery.

The previous forecast was conducted from July 27 to Aug. 3 and
released on Aug. 10.

The latest survey showed that the economists on average predicted
that the core CPI will remain in negative territory for 13 straight
quarters from the first quarter of 2009 through the first quarter of
2012.

The average forecast for the core CPI is -0.89% in the current
fiscal year that began on April 1, little changed from -0.88% projected
in the previous survey.

Japan’s core consumer prices fell 1.1% from a year earlier in July,
the 17th straight y/y drop, as retail discounts and subsidies for high
school education continued to offset higher energy costs.

The pace of decline in the core CPI — excluding fresh food but
including energy — accelerated slightly from -1.0% in June because the
year-on-year rise in energy prices continued to slow to +3.7% in July
from +4.5% in June, reducing the sector’s positive contribution to the
CPI.

For the whole of fiscal 2009 that ended on March 31, the average
national CPI fell 1.6% after rising 1.2% in fiscal 2008. The FY09 drop
was the first in five years, since -0.2% in fiscal 2004.

Meanwhile, the average economist forecast for real GDP growth was
revised down sharply to +1.93% from +2.50% for fiscal 2010, and was also
downgraded to +1.58% from +1.74% for fiscal 2011, the ESP survey showed.

These forecasts are weaker than the BOJ board’s latest median
projection at +2.6% for fiscal 2010 and +1.9% for fiscal 2011.

The pace of Japan’s economic recovery in the April-June quarter
decelerated from the previous quarter but the economy continued
expanding for the third consecutive quarter, thanks to solid exports and
business investment.

Gross domestic product grew 0.1% in April-June from the previous
quarter, or at an annualized pace of 0.4%, slowing from +1.1% q/q and
4.4% annualized in January-March.

But GDP growth in the second quarter of 2010 is expected to be
revised up sharply on Friday to around +1.6% at an annualized rate after
a government survey showed a stark improvement in business investment.

And backed by robust consumer spending on air conditioners amid
record heat waves in Japan and on vehicles before the expiry of
subsidies for low-emission cars and trucks, economic growth is forecast
to continue in the July-September quarter.

In the monthly survey, the association also asked economists when
they expect the BOJ to change its policy stance.

Of the 41 economists who provided their forecasts about one to two
weeks ago, 20 expected the BOJ to ease its policy stance further between
September this year and February next year, up sharply from only seven
in the last survey.

A total of 21 projected that the BOJ would tighten credit next
year, down sharply from 34 in the last survey. Most of them see a
tightening in or after August 2011. The forecasters are basically
choosing the latest timing available in the survey, which is in 12
months or later.

Following the Aug. 31 credit easing via enhanced liquidity
injections, the BOJ board stood pat at the last policy-setting meeting
on Sept. 6-7.

After the latest two policy meetings, BOJ Governor Masaaki
Shirakawa told reporters that the bank is closely watching the impact of
foreign exchange rates on the economy and stands ready to take policy
action “in a timely and appropriate manner.”

The BOJ has maintained the target for the overnight lending rate
among commercial banks at 0.1% since December 2008, when it lowered the
rate from 0.3% at the height of the global financial crisis. This rate
is seen as the lowest possible without hurting market functions.

tokyo@marketnews.com
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