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Bank of Japan lowers 2020 GDP estimate 0.1 percentage point

BOJ chief bullish on vaccination progress and economic recovery

People enter the Bank of Japan headquarters in Tokyo.    © AP

TOKYO -- Bank of Japan Gov. Haruhiko Kuroda offered a bullish view of the economy on Thursday, saying that COVID vaccinations are expected to make significant headway in both rich and poor countries by early next year, paving the way for an economic recovery.

"The coronavirus will be brought under control, on the assumption that significant progress will be made in vaccination campaigns in developed economies in the first half of this year, and in developing countries by early next year," Kuroda said at a news conference after a two-day policy board meeting. "I will be paying close attention to how quickly the coronavirus is brought under control so that concerns about the economy will be lifted."

The comments suggest the Japanese central bank chief thinks it is possible to defeat the pandemic in relatively short order and restore the economy to health. Kuroda pays close attention to the role of consumer and market expectations, promising eight years ago to achieve a 2% inflation target in two years, without success.

Up to now, the Japanese economy has shown more resilience than expected, despite a resurgence in coronavirus infections and a second declaration of a state of emergency earlier this month.

According to the central bank's latest quarterly outlook report, the median growth forecast among the bank's nine policy board members came to minus 5.6% for fiscal 2020 ending March, instead of minus 5.5% as predicted three months ago, according to the BOJ's latest quarterly outlook report.

The median estimate for fiscal 2021 growth came to 3.9% compared with 3.6% three months ago.

The minor downgrade for the current year and the upgrade for next year reflect the limited impact of the mild economic restrictions introduced by the government of Prime Minister Yoshihide Suga, along with expectations for U.S. growth following last month's approval of a $900 billion coronavirus relief package.

A state of emergency took effect on Jan. 8 to contain a new wave of infections. It urges people to work remotely, stay at home at night and refrain from nonessential outings. The move prompted concerns about the nascent economic recovery, but the declaration is targeted only at big metropolitan regions, unlike the nationwide restrictions imposed last year.

The new curfew "takes into account how to balance the need to stabilize the economy and to contain the virus," Kuroda said. His view is shared by private economists.

"The economic impact of the state of emergency declaration is likely to be a fraction of last year's declaration," said Yuichi Kodama, chief economist for Meiji Yasuda Research Institute. Restrictions on economic activity have been largely limited to dining out at night. Meanwhile, manufacturing activity has been little affected, he said.

The latest outlook also painted a more positive picture on overseas economies, saying "overseas economies are likely to continue improving, partly supported by aggressive macroeconomic policies."

Core inflation is forecast at minus 0.5% for fiscal 2020, instead of minus 0.6%, and at 0.5% for fiscal 2021 instead of 0.4%. An upturn in crude oil prices since the end of last year may have contributed to the change in the inflation outlook, Kodama said.

In the two-day board meeting, the central bank decided to keep its ultraloose monetary policy intact, including the short-term interest rate target of minus 0.1% and an aim of steering long-term rates to around zero. The BOJ kept its pledge to buy Japanese government debt without limit.

An exchange-traded fund purchasing program of up to 12 trillion yen ($115 billion) a year is also kept unchanged.

Last month, the bank decided to extend the 140 trillion yen emergency funding facilities by six months through the end of September.

Under the emergency funding programs, the BOJ could purchase up to 20 trillion yen in corporate bonds and commercial paper and provide as much as 120 trillion yen in interest-free funds for up to one year to commercial banks that have lent to businesses and households, and offer the banks a 0.1% interest on the balance of such loans.

As of the end of December, the BOJ has provided 51.6 trillion yen in funds to commercial banks.

Through eight years of aggressive asset-buying under Gov. Haruhiko Kuroda, the BOJ has seen its balance sheet more than quadruple, and has come to own about half the Japanese government debt and about 7% of the stocks listed on the Tokyo Stock Exchange's first section.

Kuroda took the helm in 2013, vowing to bring about 2% inflation in two years. Since then, however, core consumer inflation mostly hovered around 1% or less. With the easing campaign expected to become a prolonged battle amid the coronavirus pandemic, the BOJ said last month that it will conduct a review of the current framework to make it more sustainable and effective toward the 2% inflation goal. The results of the review will be announced in the next meeting to be held March 18-19.

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