BOJ May Raise Growth Forecasts on Export-Led Optimism

By Mayumi Otsuma and Keiko Ujikane

April 8 (Bloomberg) -- The Bank of Japan’s increased optimism about the export-led recovery suggests the policy board may raise its forecasts for economic growth and prices later this month, economists said.

Governor Masaaki Shirakawa told reporters after a policy meeting yesterday that “the economy is currently picking up steadily and on top of that, we are seeing some signs of future progress.” His board, which left interest rates at 0.1 percent and chose not to expand deflation-fighting measures, will review its outlook for the economy and prices on April 30.

“There’s a high chance that the central bank will raise its growth forecast to around 2 percent from its January forecast of 1.3 percent” for the year ending March 2011, said Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc. in Tokyo. “The recovery in exports is spilling over to domestic demand faster than people had expected.”

Reports since Shirakawa doubled a bank lending program to 20 trillion yen ($212 billion) three weeks ago have shown an uneven recovery: exports rose, along with business and consumer confidence, while machinery orders, consumer prices and wages continued to fall. The bank won’t rule out further monetary easing amid pressure from the government to tackle deflation ahead of a July election, said economist Yoshimasa Maruyama. “Raising the growth forecast means the BOJ doesn’t think more easing policies are necessary,” said Maruyama, senior economist at Itochu Corp. in Tokyo. “But it’s still possible that the bank will be forced to implement them because of political pressure before the election.”

‘More Self-Sustained’

Shirakawa said yesterday that the central bank “advanced our economic assessment by one step because the economy’s pickup is becoming more self-sustained and concerns about a double dip have pretty much gone.”

The Nikkei 225 Stock Average has risen 11 percent since the end of February on speculation the recovery will last. It slipped 0.7 percent at 10:06 a.m. in Tokyo. The yen has weakened 3 percent in the past month, improving the earnings outlook for exporters such as Honda Motor Co. and Canon Inc.

BOJ officials cited exports as a driver of the expansion in yesterday’s statement, after describing stimulus measures as the main reason for the rebound in previous months. “High growth in emerging economies” is propelling shipments and production, the central bank said, while adding that beating deflation remains a “critical challenge.”

Still Reluctant

Companies are still reluctant to ramp up spending in the wake of the country’s worst postwar recession, a government report showed today. Machinery orders, an indicator of future business investment, slid 5.4 percent in February from January, a second monthly decline, the Cabinet Office said. It kept its view that orders are “leveling off” after slumping to a record low in November.

Maruyama at Itochu estimates policy makers will raise their growth outlook for the year ending March 2011 to the “upper 1 percent range” in this month’s semiannual review. In January, the bank affirmed forecasts of an 1.3 percent expansion this year and 2.1 percent in fiscal 2011.

It also said consumer prices would slide 0.5 percent this fiscal year and 0.2 percent in the year ending March 2012. BOJ officials may say next fiscal year’s price changes will approach zero percent, a person familiar with the matter said last month.

Price Upgrade

Economists including Murashima and Norio Miyagawa say the prospect of faster growth and a narrower gap between supply and demand means such an upgrade is possible. “Rising commodity prices may also be taken into account,” said Miyagawa, a senior economist at Shinko Research Institute in Tokyo. “There was a prevailing view that Japan’s core prices wouldn’t resume rising until fiscal 2012, but the perception is changing,” said Hideo Kumano, a former BOJ official and now chief economist at Dai-Ichi Life Research Institute in Tokyo. “Deflationary pressure on the economy is easing.”

Even so, political pressure on the central bank continued last week as about 100 legislators of the ruling Democratic Party of Japan formed a group to urge the bank to act on deflation. The bank’s March credit expansion came after Finance Minister Naoto Kan urged it to act. “Expectations for further policy easing remain strong in financial markets and those folks cite political pressure to call for an early end to deflation,” said Naka Matsuzawa, chief investment strategist at Nomura Securities Co. in Tokyo.

Deflation Effects

Consumer prices excluding fresh food, the BOJ’s preferred measure, declined for a 12th month in February. Deflation can erode profits, prompt companies and consumers to delay spending, and increase the real value of debt.

The government is relying on the BOJ as its ability to stimulate demand with fiscal spending is limited by record public debt. Kan and National Strategy Minister Yoshito Sengoku are working on a strategy for repairing the nation’s finances.

“The next significant move is still likely to be a further loosening,” said Julian Jessop, chief international economist at Capital Economics Ltd. in Tokyo. Monetary easing “will be needed if the government’s medium-term fiscal plans, due to be announced in June, make a serious attempt to tackle the huge holes in the public finances.”