TOKYO: The Bank of Japan maintained its view the world's third-largest economy is recovering but offered a bleaker take on exports and output, nodding to a recent batch of soft data that dashed hopes overseas shipments will pick up in time to offset the pain from a sales tax hike in April.
The central bank, however, added that household spending remains firm, underscoring its conviction that no fresh stimulus is required even though data next week is expected to show the biggest contraction in economic activity since the global financial crisis.
"Exports have shown some weakness," the BOJ said in a statement issued after the policy meeting on Friday, revising down its assessment from last month, when it said they were moving sideways.
"Industrial output has continued to increase moderately as a trend, although it has recently shown some weakness," the central bank said. That was a less optimistic view than last month, when it said production is increasing as a trend.
Markets are focusing on how Governor Haruhiko Kuroda will describe risks to the outlook at his post-meeting news conference, although many analysts expect him to reiterate his view the economy can weather the hit from the tax hike without further near-term stimulus.
"The BOJ does not need to change its expectations that inflation will accelerate again due to strong domestic demand," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities. "However, risks from overseas have risen, and this puts the BOJ in a more uncomfortable position."
As widely expected, the BOJ maintained its policy framework, under which it has pledged to increase base money by 60-70 trillion yen ($587-685 billion) per year through aggressive asset purchases to reflate the moribund economy and drive inflation toward 2 percent sometime next year.
Exports unexpectedly fell in June for a second straight month and output plunged at the fastest pace since the March 2011 earthquake, casting doubt on the BOJ's view the economy will fairly quickly ride out the pain from the April tax hike.
A private factory survey showed new export orders grew in July for the first time in four months, although only modestly.
Adding to the gloom, Japan's Nikkei share average slumped to a two-month low on Friday on worries that escalating tensions between Russia and the West could hurt global growth.
GROWTH DOUBTS
While the BOJ already expects Japan's economy to shrink in the second quarter due to the tax hike effect, the contraction may prove to be bigger - and the rebound more modest - than projected given the delay in an export pick-up and weak household spending, analysts say.
Some in the nine-member board, such as Koji Ishida, are more cautious about the outlook than Kuroda. Ishida warned last month that structural issues may further delay an export rebound.
Heightening worries for policymakers, wage data was soft in June with only a modest rise seen in bonuses and regular pay despite Prime Minister Shinzo Abe's calls for companies to raise base salaries so consumers can keep spending.
The closely-watched April-June gross domestic product data, due out next week, is expected to show Japan's economy shrank an annualised 7.1 percent due to the tax hike pain, according to a Reuters poll, the biggest contraction since the first quarter of 2009 amid the doldrums of the global financial crisis.
Some private-sector analysts say such a big contraction in the second-quarter may mean economic growth in the current business year will far undershoot the BOJ's current projection of an 1.0 percent increase.
"We already know the April-June contraction will be quite big. What's more worrying is the overall weakness in June data, which suggests the third-quarter rebound may be moderate," said Hideo Hayakawa, a former top BOJ top economist and now senior executive fellow of private think tank Fujitsu Research Institute.
"But I don't think Kuroda minds even if growth remains subdued, as long as inflation keeps accelerating," he said.
However, the weak GDP data, as well as sluggish wage growth, could also heighten private economists' scepticism that the BOJ will be able to meet its target of pushing inflation to 2 percent sometime next year without further stimulus.
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