TOKYO: Japan's economy is likely to rebound less than previously expected this quarter, while inflation will stay below the central bank's target well into the future, a Reuters poll showed, compounding worries about the sputtering recovery.
Economists in the Reuters poll trimmed their forecasts for July-September growth after the economy took a bigger hit than expected in the second quarter from a sales tax increase in April. This quarter's rebound is vital for policymakers.
Prime Minister Shinzo Abe has said these growth figures will be key to his decision around year-end on whether to raise the sales tax again in 2015 to try and curb runaway government debt.
A feeble recovery would also increase pressure on the Bank of Japan to increase its massive stimulus programme to bolster growth and bring about an end to 15 years of deflation.
The world's third-biggest economy will grow by an annualised 3.6 percent this quarter, bouncing from a 7.1 percent plunge in the second quarter, according to the Reuters poll of 27 economists conducted Sept 10-17.
That would be modestly slower than expected growth of 3.8 percent seen in last month's poll.
Analysts tipped growth to slow again to 2.1 percent in the fourth quarter, unchanged from the Reuters August survey.
Abe said on Sunday he is "neutral" on the politically fraught tax decision.
By law the tax is to rise to 10 percent next year from 8 percent now, but the premier must certify that the recovery is strong enough to weather the pain. Most respondents in the Reuters survey forecast Abe will raise the tax, although some said he might delay the increase.
"The economy is expected to return to a recovery path from around autumn," said senior economist Yusuke Shimoda at the Japan Research Institute.
The pullback in demand after April's tax hike will run its course, while the economy will get a boost from government steps such as public spending and improving incomes and jobs, he said.
"But real wages, which are weighed down by price increases, could slow the recovery in consumer spending."
In the fourth straight cut to the forecast for the fiscal year to March, the analysts predicted growth of 0.3 percent, down from 0.4 percent projected last month. In May, they were forecasting 1.0 percent growth.
They increased their forecast for next fiscal year to 1.3 percent from 1.2 percent in the last poll.
Analysts continue to see inflation stalling around current levels, barely halfway to the BoJ's 2 percent target, which it hopes to hit next fiscal year.
The Reuters survey tips inflation of 1.2 percent this fiscal year and next, the same as last month.
Eight of 19 analysts expect the BOJ to ease policy again this year while the other 11 said the central bank would hold policy steady until next January at least.
YEN RATE
The yen has slid to more than six-year lows this week as the dollar popped to above 109 yen on expectations the Federal Reserve is moving toward raising interest rates while the BoJ is under pressure to ease further.
For decades a strong yen has bedevilled Japan's export-reliant economy, but the current weakness is starting to push past companies' comfort zone as the pain from higher import costs outweighs the boost for exporters.
In the Reuters survey, six analysts said the optimal exchange rate for the dollar was between 100 yen and 104 yen, seven selected 105 yen and 109 yen, four said 110-114 yen and one said 115-119 yen.
"The situation has already been getting tough for importers, and industry is also saying further yen weakness is not favourable," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.
"Big exporters will benefit from a weak yen but small and medium-sized companies which are not linked to exports will be damaged.
Also it is not good from the perspective of real purchasing power."
Data this week showed confidence among Japanese manufacturers fell the most in nearly two years in September as the tax increase hit the economy harder than expected, while exports slid in August in a further sign that conditions have deteriorated in the third quarter.
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