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2017.04.2415:41:00UTC+00Bank of Japan Likely to Upgrade Economic Growth Projection, may Lower Inflation Outlook - Dbs

The Bank of Japan board members are likely to upgrade their growth projection during its upcoming meeting on Thursday, according to a DBS research report. However, it is also expected to lower its projection for inflation. Owing to the rebound in global trade, Japan has seen marked rebounds in export, employment growth and industrial production in recent months.

The IMF raised its projection of Japan’s GDP growth for this year in its latest world economic outlook report that was released last week. The IMF projects Japanese economy to expand 1.2 percent in 2017 as compared with their prior forecast of 0.8 percent. However, in spite of the rebounding output gap and the tightening labor market conditions, consumer prices and wages have stayed almost flat, stated DBS.

The Bank of Japan’s core CPI forecast of 1.5 percent for FY2017 does not seem realistic. Currently, policymakers of BoJ continue to hope that the tightness in labor market would be shifted into higher wages and price growth in the second half of 2017. If prices and wages data continue to dismay, the central bank might face the pressure to further lower its inflation projection and extend the timing to achieving the inflation target of 2 percent.

The short-term policy rate and the long-term yield target are likely to stay the same at -0.1 percent and “around 0 percent” respectively on Thursday, noted DBS. There is space for the Bank of Japan to decelerate the rate of bond purchases during regular operations, given the latest fall in JGB yields in the midst of the environment of geopolitical tensions and global risk aversion. However, it is quite soon to anticipate the central bank to begin the process of exiting QE, added DBS.

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