In its report on recent economic and financial developments for April, the Bank of Japan (BoJ) downgraded its appraisal of the current economy. In the report for March, the BoJ stated that the economy was expanding moderately, even though more slowly than in the past, due mainly to a drop in housing development and to high costs of energy and raw materials. In the April report, the BoJ omitted the mention of moderate expansion, stating merely that growth was slowing due to the same factors as those highlighted in March.
The bank lowered its evaluation of current corporate profits and capital investment based on the results of its March Tankan survey. Thus, in essence, the BoJ confirmed the government's earlier announcement that the economy had reached a plateau in March. The BoJ also downgraded its projections for the economy in its April report. Thus, the bank apparently no longer foresees a tightening of the output gap in the near term.
Whereas the bank had projected growth of capital investment and personal consumption in its March report, it projected a firm bottom for both in its April report. In the March report, it had projected a recovery of housing investment. In its April report, it maintained a projection of recovery, but added that it would be slow.
With regards to prospects for consumer prices, in the April report, the bank omitted the expectation of a long-term uptrend due to a tightening of the output gap mentioned in its March report.
The BoJ's current monetary policy stance of a gradual rise in interest rates is predicated on a gradual tightening of the output gap. Now that the bank expects a prolonged slowdown of the economy, it does not foresee a tightening of the output gap soon. Thus, in essence, there is no longer a basis for raising interest rates.
The BoJ policy board held its April meeting on April 8 and 9 and voted unanimously to maintain current interest rates. Following the meeting, the new BoJ Governor Masaaki Shirakawa gave his first press conference since being confirmed as head of the bank on April 9. Some observers expected him to be more hawkish on monetary policy than his predecessor, Toshihiko Fukui.
However, Governor Shirakawa confirmed the policy followed under Mr Fukui and reaffirmed that policy would be based primarily on prospects for the bank's standard scenario for economic growth and prices.
The standard scenario is based on the assumption that the US economy will recover gradually from the middle of this year but this scenario was put in doubt by the International Monetary Fund's latest growth projections, announced on April 9.
The IMF forecast real GDP growth of only 0.5 per cent for the US in 2008 and 0.6 per cent in 2009. This implies that the BoJ's downside risk scenario is about as probable as its standard scenario. Governor Shirakawa avoided the implications of these forecasts, stating merely that although there were uncertainties about the economy, it is currently quite strong.
The BoJ's next semi-annual outlook for economic activity and prices will be reported on April 30. Unless some measures of the economy change dramatically between now and then, we expect basically no change in the monetary policy stance in the April report, although it probably will repeat the weaker evaluation of the economy and its prospects found in the April report of recent economic and financial developments. We expect the April outlook report to also repeat the upside risks to the BoJ's standard scenario, as well as downside risks.
Japan's financial markets seem to believe that the BoJ Governor is not dovish on interest rates and that there is little chance of a rate cut in the near term. However, testifying prior to his confirmation, he said nothing to indicate that he would change the current monetary policy stance. His comments were merely principle theories of conducting monetary policy. The BoJ officially asserts that the current stagnancy of Japan's economic cycle is temporary.
We believe that any reappraisal of this conclusion would depend on the degree and speed with which the BoJ appraises export trends. Although Japan's exports and economy are less dependent on the US economy than they used to be, they are still highly dependent on it. Thus, the ongoing weakening of the US economy will inevitably hurt Japanese economic growth, although the timing and extent of this effect are open to debate. A resumption of a trend of weakness in the dollar against the yen and other currencies would also have a large impact on policy implementation. Given the likelihood of a slowdown in Japan's exports, we still believe the BoJ will lower interest rates in June.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.
The bank lowered its evaluation of current corporate profits and capital investment based on the results of its March Tankan survey. Thus, in essence, the BoJ confirmed the government's earlier announcement that the economy had reached a plateau in March. The BoJ also downgraded its projections for the economy in its April report. Thus, the bank apparently no longer foresees a tightening of the output gap in the near term.
Whereas the bank had projected growth of capital investment and personal consumption in its March report, it projected a firm bottom for both in its April report. In the March report, it had projected a recovery of housing investment. In its April report, it maintained a projection of recovery, but added that it would be slow.
With regards to prospects for consumer prices, in the April report, the bank omitted the expectation of a long-term uptrend due to a tightening of the output gap mentioned in its March report.
The BoJ's current monetary policy stance of a gradual rise in interest rates is predicated on a gradual tightening of the output gap. Now that the bank expects a prolonged slowdown of the economy, it does not foresee a tightening of the output gap soon. Thus, in essence, there is no longer a basis for raising interest rates.
The BoJ policy board held its April meeting on April 8 and 9 and voted unanimously to maintain current interest rates. Following the meeting, the new BoJ Governor Masaaki Shirakawa gave his first press conference since being confirmed as head of the bank on April 9. Some observers expected him to be more hawkish on monetary policy than his predecessor, Toshihiko Fukui.
However, Governor Shirakawa confirmed the policy followed under Mr Fukui and reaffirmed that policy would be based primarily on prospects for the bank's standard scenario for economic growth and prices.
The standard scenario is based on the assumption that the US economy will recover gradually from the middle of this year but this scenario was put in doubt by the International Monetary Fund's latest growth projections, announced on April 9.
The IMF forecast real GDP growth of only 0.5 per cent for the US in 2008 and 0.6 per cent in 2009. This implies that the BoJ's downside risk scenario is about as probable as its standard scenario. Governor Shirakawa avoided the implications of these forecasts, stating merely that although there were uncertainties about the economy, it is currently quite strong.
The BoJ's next semi-annual outlook for economic activity and prices will be reported on April 30. Unless some measures of the economy change dramatically between now and then, we expect basically no change in the monetary policy stance in the April report, although it probably will repeat the weaker evaluation of the economy and its prospects found in the April report of recent economic and financial developments. We expect the April outlook report to also repeat the upside risks to the BoJ's standard scenario, as well as downside risks.
Japan's financial markets seem to believe that the BoJ Governor is not dovish on interest rates and that there is little chance of a rate cut in the near term. However, testifying prior to his confirmation, he said nothing to indicate that he would change the current monetary policy stance. His comments were merely principle theories of conducting monetary policy. The BoJ officially asserts that the current stagnancy of Japan's economic cycle is temporary.
We believe that any reappraisal of this conclusion would depend on the degree and speed with which the BoJ appraises export trends. Although Japan's exports and economy are less dependent on the US economy than they used to be, they are still highly dependent on it. Thus, the ongoing weakening of the US economy will inevitably hurt Japanese economic growth, although the timing and extent of this effect are open to debate. A resumption of a trend of weakness in the dollar against the yen and other currencies would also have a large impact on policy implementation. Given the likelihood of a slowdown in Japan's exports, we still believe the BoJ will lower interest rates in June.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.