BOJ expects deeper recession, to monitor effect of new flu

TOKYO, April 30 Kyodo -
The Bank of Japan on Thursday slashed its economic forecast for the current
business year ending next March to a 3.1 percent contraction to reflect a
deeper recession, but it added that the pace of deterioration is likely to
moderate in the latter half of fiscal 2009.
In its biannual economic report, the central bank also called for vigilance
over the possible effects of a new type of influenza on economic activity.
At a one-day policy meeting to adopt the report, the BOJ left its key interest
rate unchanged at 0.1 percent.
The Japanese central bank predicted in January that the country's real gross
domestic product would fall 2.0 percent in fiscal 2009, already the worst
negative growth in the postwar era. But in view of worsening conditions,
particularly for Japan's mainstay exports, the BOJ revised its forecast
downward in the report titled ''Outlook for Economic Activity and Prices.''
''Economic conditions in Japan have deteriorated significantly,'' the BOJ said
in the report, adding that weakening corporate earnings and financial
conditions have caused significant cuts in capital investment, and worsening
employment and income conditions have sharply discouraged consumer spending.
The central bank also said it will carefully monitor the possible spread of the
new type of influenza mutated from swine flu and its influence on economic
activity.
''The direct impact (of the spread of the flu) on financial and capital markets
still seems to be limited... but we need to carefully monitor the effects as a
potential risk factor,'' BOJ Governor Masaaki Shirakawa said at a press
conference.
Following the recent emergence of signs of improvement in economic data, the
BOJ said it expects a recovery to come before the end of the current fiscal
year thanks partly to progress in inventory adjustments and positive effects
from policy actions taken in various countries.
''Economic conditions are likely to continue deteriorating in coming months but
gradually level out thereafter, and the growth rate is expected, from the
latter half of fiscal 2009, to recover at a moderate pace,'' the BOJ report
said.
The recovery is, however, likely to greatly depend on developments in overseas
economies and global financial markets, Shirakawa said.
''It's still highly uncertain how the restructuring of the U.S. and European
financial systems is likely to proceed and how rapidly demand around the world,
especially in emerging economies, is likely to recover,'' he said.
The BOJ did not take any new policy actions at the day's policy meeting after
introducing a series of emergency steps aimed at easing corporate funding
strains in its previous policy meetings, deciding to monitor the effects of the
existing framework.
The BOJ's eight-member Policy Board voted unanimously to leave the target rate
for unsecured overnight call money unchanged.
''I can see that the BOJ is gradually changing its stance from the all-out
monetary easing seen in the past half a year'' following recent emerging signs
of improvement, most recently the surprisingly strong 1.6 percent rise in
Japan's industrial production in March, revealed earlier in the day, said Hideo
Kumano, chief economist at Dai-ichi Life Research Institute.
But if unexpected contingencies occur, such as those related to the U.S. and
European financial system, the central bank will have to quickly move back to
easing, he said.
The BOJ's downgrading of its economic outlook came after the government revised
downward its projection for the Japanese economy to a contraction of 3.3
percent and submitted to parliament a record extra budget for FY 2009 to
finance Prime Minister Taro Aso's fresh stimulus package.
For fiscal 2010 starting in April of that year, the BOJ is forecasting that GDP
will grow 1.2 percent, a slower pace than its previous forecast of a 1.5
percent expansion.
For the previous business year that ended in March, the bank estimated the
economy shrank 3.2 percent.
The BOJ said it is projecting bigger price falls for the current and next
fiscal years than its January estimates, but said declines in consumer prices
are likely to narrow gradually from the latter half of fiscal 2009.
The bank now expects consumer prices excluding volatile fresh food prices to
fall 1.5 percent this fiscal year and drop 1.0 percent the following year.
The BOJ releases the report on economic and price forecasts, which form a base
for monetary policy decisions, in April and October, and reviews the forecasts
in January and July.
==Kyodo