BOJ downgrades economic view of 3 regions on slowing economy

The Bank of Japan on Wednesday downgraded its economic assessments of three out of the country’s nine regions, citing slowing production due to weak demand from overseas.

The Bank of Japan cut its economic assessment for three of the country’s nine regions but remained cautiously optimistic that domestic demand could help offset a slowdown in exports and manufacturing.

All of the regions kept their assessment on private consumption unchanged, despite fluctuations in spending patterns around the Oct. 1 sales tax hike, likely backing the BOJ’s rosy view that solid domestic demand will offset external headwinds.

The BOJ’s optimism is likely to allow it to justify keeping monetary policy steady for the time being.

“All nine regions reported that their economies were either expanding or recovering,” the central bank said in the regional report. “Domestic demand continued on an uptrend, with a virtuous cycle from income to spending operating in both the corporate and household sectors.”

The downgrades for the northern region of Hokuriku, the central region of Tokai - home to Toyota Motor Corp - and the western area of Chugoku were due to weak exports and output caused by the global slowdown, which has slowed their rate of expansion.

Still, Tokiko Shimizu, the Nagoya branch manager overseeing the Tokai region, said positive signs were emerging, while the impact of the sales tax hike will be limited.

Demand for machine tools from the United States and China appeared to be bottoming out, adjustments in car output and inventories in China were making steady progress, and production of IT-related goods was recovering, she said.

“A moderate expansion will continue in the Tokai region for the time being, but the economy will be getting on a firmer footing as factors weighing on output and exports taper from now on,” she told reporters after the BOJ branch managers’ meeting.

The central bank is likely to slightly revise up its economic forecasts for this fiscal year to March at its policy review next week, boosted by the government’s latest spending package, sources told.

The more optimistic outlook comes from an improvement in domestic demand due to stronger corporate investment, solid household income and employment, and an expected boost from public spending.

The BOJ’s nine-member board will also review its current forecasts for core consumer inflation to hit 1.1 per cent in fiscal 2020 and to accelerate to 1.5 per cent the following year, although big changes to these projections are seen as unlikely. Projections of tame inflation should further back market expectations that the BOJ will keep monetary policy ultra-loose to achieve its elusive 2 per cent price goal.

At the branch managers’ meeting, Governor Haruhiko Kuroda held to the BOJ’s view that the Japanese economy will see moderate growth despite weak exports and output, hit by the global slowdown and natural disasters at home.

Kuroda dropped few hints on what steps the central bank might take next, while repeating his readiness to ease further as needed to achieve the inflation target.

Kuroda also said consumer inflation, which is hovering around 0.5 per cent, would accelerate towards 2 per cent, even though it could be affected for the time being by falling oil prices.

“We will adjust policy as necessary to maintain momentum towards our price stability target while examining risks,” he said. “We will not hesitate to take additional easing steps if risks heighten to an extent that the momentum towards the price target is undermined.”

It is the first time the central bank has downgraded its view on three regions since April last year. The BOJ left unchanged its assessments of the remaining six regions: Hokkaido, Tohoku, Kanto-Koshinetsu, Kinki, Shikoku and Kyushu-Okinawa. In its quarterly Sakura report, the BOJ revised down its views on Hokuriku and Tokai in central Japan, as well as Chugoku in western Japan, whose economies are relatively dependent on exports.

All nine regions reported that their economies had been “either expanding or recovering” as domestic demand “had continued on an uptrend,” according to the report.

However, the report also said “exports, production, and business sentiment had shown some weakness, mainly affected by the slowdown in overseas economies and natural disasters.”

Reuters