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TOKYO (MNI) – Economists continue to revise up their forecasts for
Japan’s economic growth for the next couple of years while projecting
again that the pace of consumer price drops will decelerate next year
but only gradually, according to the latest monthly survey by the
Cabinet Office’s Economic Planning Association released on Wednesday.

The survey also showed that fewer forecasters predicted that the
Bank of Japan will ease credit this year, compared with the previous
survey, while a majority continued to see a tightening next year. The
association provided no reasons for the change.

The survey showed economists on average expect Japan’s core
consumer price index to drop at a slower pace than forecast last month,
from the second half of 2010 onward, and recover to zero in the first
quarter of calendar 2012, instead of a slight drop as predicted until
last month.

The average forecast by the economists for the core CPI (excluding
fresh food) for fiscal 2011 ending March 31, 2012 was -0.08% y/y,
revised up from their previous forecast of -0.14%.

It is more or less in with the latest median projection by the Bank
of Japan’s policy board at +0.1% for fiscal 2011, but it still means
that Japan will post three years of continued price drops.

The association polled 42 economists and research institutions from
May 26 to June 2 for its ESP Forecast, and 38 answered on the growth and
inflation outlook and 37 on the BOJ’s monetary policy stance.

The previous forecast was conducted from April 23 to May 6 and
released on May 13.

The latest survey showed that the economists on average predicted
that the core CPI will remain in negative territory for 12 straight
quarters from the first quarter of 2009 through the final quarter of
2011, compared with 13 consecutive quarters forecast until last month.

The average forecast for the core CPI is -0.93% in the current
fiscal year that began on April 1, revised up slightly from -0.98%
projected in the previous survey.

Japan’s core consumer inflation rate fell to -1.5% in April, the
14th straight year-on-year drop, with retail discounts overwhelming
higher energy costs.

The pace of decline accelerated from -1.2% in March, as widely
expected, due to a drop in high school tuition after the government
began providing subsidies at the start of the new fiscal year as part of
its economic stimulus measures to support households.

Continued sharp discounts on durable goods — heaters/air
conditioners, flat-screen TVs and personal computers — led the price
drop, overwhelming a year-over-year rise in gasoline and heating oil
costs.

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.

The survey also showed that economists expect Japan’s economy to
pick up the pace of its gradual recovery from the global recession for
the coming quarters except for late 2010 and early 2011. From the third
quarter of 2011 onward, they foresee a high annualized pace of real GDP
growth above 2%.

The average forecast for real GDP was revised up slightly to +2.42%
from +2.22% for fiscal 2010, and to +1.82% from +1.80% for fiscal 2011.

The BOJ board’ latest median forecast for real GDP unveiled in its
semi-annual Outlook Report in April is +1.8% for fiscal 2010 and +2.0%
for fiscal 2011.

Japan’s economy posted the fourth straight quarter of growth in the
January-March period, backed by strong exports to Asia, continued
consumer spending gains and a recovery in business investment, but for
the whole of fiscal 2009 marked the second largest drop on record in
inflation adjusted terms (-1.9%).

Preliminary Q1 data released last month showed that the 1.2% q/q
gain in real GDP, an annualized rate of +4.9%, was supported almost
equally by domestic demand (+0.6 percentage point) and overseas demand
(+0.7 point).

The Cabinet Office will release revised (second preliminary) GDP
data for January-March 2010 on Thursday.

Economists expect the initial estimate of near 5% annualized growth
to be revised down to a range of 3.5% to 4.0% after a quarterly survey
by the Ministry of Finance showed depressed business investment last
week.

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

Of the 37 economists who provided their forecasts about one to two
weeks ago, 27 expect the BOJ to tighten its policy stance in or after
May 2011 and one each sees a credit-tightening in March and April 2011.

Those foreseeing a credit tightening totaled 29, unchanged from the
previous survey.

The forecasters are basically choosing the latest timing available
in the survey, which is in 12 months or later.

A total of eight economists forecast that the BOJ will loosen its
credit grip further, down from 10 in the previous survey: three said
around June (this month), another three said around July and two said
around September this year.

BOJ policymakers are saying the bank’s credit-easing measures have
helped lower borrowing costs for banks and thus funding costs for
companies. But they have also vowed to continue supporting the economy
with a practically zero interest rate and ample fund injections in
financial markets because it is expected to take some time to overcome
deflation.

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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