Quake shock prompts BOJ to cut economic outlook+

TOKYO, April 28 Kyodo -
The Bank of Japan on Thursday downgraded its economic growth forecast for fiscal 2011 to 0.6 percent from an earlier projected 1.6 percent as the country has been seriously damaged by the March 11 earthquake and tsunami.
In its biannual outlook report, however, the central bank upgraded its estimate of real gross domestic product growth in fiscal 2012 to 2.9 percent from 2.0 percent forecast in January, expecting a potential surge in domestic demand in the event that reconstruction work accelerates in areas devastated by the disaster.
The BOJ ''fully recognizes the considerable uncertainty over the outlook,'' BOJ Governor Masaaki Shirakawa said at a press conference. ''It is necessary to be mindful of downside risks (to growth), mainly the impact from the earthquake, for the time being.''
The report was approved earlier in the day by the bank's Policy Board, which also decided to hold its key short-term interest rate steady at around zero to 0.1 percent to boost the economy while maintaining its 40 trillion yen asset purchase program.
On prices, the report said Japan's core consumer prices, excluding fresh food, would rise 0.7 percent annually in both fiscal 2011 and 2012. In January, when the BOJ reviewed its previous report, the central bank projected core consumer prices in the two years would grow 0.3 percent and 0.6 percent, respectively.
The forecasts suggest Japan will beat deflation but the figures are far below the BOJ's understanding of medium- to long-term price stability with core prices changing in a positive range of 2 percent or lower.
Naohiko Baba, chief economist at Goldman Sachs Japan Co., said the BOJ apparently believes that ''while the macroeconomic balance between supply and demand has been recovering as a basic trend, the CPI (consumer price index) will continue moderate gains amid rising commodity prices.''
The report also said Japan's wholesale prices are expected to rise 2.2 percent in fiscal 2011, upwardly revised from a 1.0 percent increase, on higher crude oil and other raw material costs.
The Japanese economy ''will inevitably continue to face strong downward pressure for the time being,'' it said, while pointing to the possibility of a recovery supported by strong growth in overseas economies, especially those in Asia.
Given uncertainty over when and how the negative impact of the disaster will play out, ''it has become even more important than usual for the Bank of Japan to carefully assess not only its baseline scenario but also risk factors,'' the report added.
The downgrading of the growth forecast for the current fiscal year, which started this month, came as the natural disaster that struck northeastern Japan has caused serious disruptions to supply chains throughout the country as major auto and electronic machinery makers have production bases for crucial components in the devastated areas.
Shirakawa said earlier that Japan's GDP growth rate would turn negative in the period between January and June. But he also said it could return to positive territory in the three months starting in July, expecting new demand to emerge.
Japanese production has already come under pressure from the disruptions. Government data showed Friday the index of industrial output marked the sharpest ever fall of 15.3 percent in March from February, worse than the 8.6 percent slide in February 2009 amid the global economic downturn after the collapse of Lehman Brothers Holdings Inc. in 2008.
Slower production is hitting the country's exports. The Finance Ministry said last week that exports in March marked their first year-on-year fall in more than a year.
Many other economic indicators have added to pessimism, including auto production, business and consumer confidence as well as retail sales.
The most serious threat remains electric power supply shortages triggered by damaged nuclear and thermal power stations. The government is eager to prevent a massive blackout in the summer when power demand normally surges.
In the BOJ's policy meeting Thursday, Deputy Governor Kiyohiko Nishimura made a proposal for the BOJ's asset purchase program to be expanded to 45 trillion yen, but it was voted down by the eight other board members, including Shirakawa.
The central bank also announced the details of a 1 trillion yen emergency loan program agreed on earlier this month. The program is aimed at helping to finance the early phase of the reconstruction process following the natural disaster by encouraging commercial lenders to channel money to companies struggling to keep their businesses going in devastated areas.
Under the program, funds will be lent for one year at an interest rate of 0.1 percent, with the maximum amount of loans per financial institution set at 150 billion yen. The program will be implemented through October.
In addition, the BOJ decided to ease its standards for eligible collateral that it accepts during routine fund-supply operations for the benefit of financial institutions operating in quake-hit areas. Specifically, it will accept corporate bonds issued by companies in the areas and other assets with lower credit ratings as eligible collateral, effective through October 2012.
(Additional reporting by Mai Iida)