TOKYO -- The Bank of Japan on Wednesday forecast the nation's economy to contract 4.7% in fiscal 2020 despite recent signs of gradual recovery, a reminder that bouncing back from the coronavirus pandemic will be difficult.
The estimate, released in a quarterly outlook report, is the median of forecasts from all BOJ policy board members, which ranged from minus 4.5% to minus 5.7%. The range represented a worsening from the April estimate of a contraction of between 3.0% and 5.0%.
"The downshift reflects a slower-than-expected recovery, both in Japan and overseas," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
"The pace of recovery is expected to be gradual," said Haruhiko Kuroda, the central bank's governor, at a news conference after a two-day policy board meeting. The BOJ's funding assistance to businesses will need to be kept in place for some time, he added.
Kuroda highlighted positive aspects of the economy, saying, "The number of bankruptcies has been limited so far, and unemployment has increased, but not as much as in other countries or after the Lehman crisis."
The fact that the BOJ was able to provide a median growth forecast in the latest outlook report also indicates that it is less uncertain about the direction of the economy than three months ago, following the lifting of lockdowns in most countries.
"They are now comfortable providing a median. That's one sign that a little bit of uncertainty has been lifted for them," said Izumi Devalier, chief Japan economist at Merrill Lynch. With the economy reopening, "we can now talk about a recovery trajectory," Devalier said.
The central bank appeared more upbeat about growth in the next fiscal year and beyond, predicting that the contraction could be followed by an expansion of 3.3% in fiscal 2021 and 1.5% in 2022. The Japanese fiscal year ends in March.
Policy board members' growth forecasts have improved to between 3.0% and 4.0% from between 2.8% and 3.9% for 2021, and to between 1.3% and 1.6% from between 0.8% and 1.6% for 2022.
Core consumer inflation is projected to fall 0.5% in fiscal year 2020 before rebounding 0.3% in fiscal 2021 and 0.7% in fiscal 2022.
The outlook report was released after the two-day policy meeting in which the central bank decided to leave the monetary policy unchanged for a second straight month, opting to monitor the pace of the nascent recovery.
Since the outbreak of the coronavirus pandemic, the central bank has launched a raft of emergency funding programs to keep the economy afloat.
They include pledges to supply more than $1 trillion worth of interest-free credit to banks to support household and business lending, equity purchases of up to 12 trillion yen a year, and government debt purchases without a limit.
The target for short-term interest rates are left unchanged at minus 0.1% and those for long-term rates at about zero.
The decision to keep the main policy tools intact was in line with market expectations.
The wait-and-see stance comes two weeks after the bank's Tankan quarterly sentiment survey, an early indicator of the nation's economic cycles, showed that businesses expect a modest rebound in activity in the July-September quarter, much to the relief of policymakers.
Other economic indicators point to the economy bottoming out in May, the month when Prime Minister Shinzo Abe's government started a phased lifting of a coronavirus state of emergency to allow shops and restaurants to reopen, office workers to commute, and people to travel.
Retail sales rebounded 2.1% on the month in May, according to the Ministry of Economy, Trade and Industry.
Financial markets have also stabilized. The benchmark Nikkei Stock Average, which lost as much as 30% in March, largely recovered ground by June. The Japanese yen also trades at a level little changed from the beginning of the year.
Economists warn against complacency, however, pointing to a possible jump in unemployment as government support for businesses runs out. This will make it difficult for companies to keep employees without much work to do on the payroll amid an ongoing shift to teleworking.
"Even if growth is rebounding mechanically, remember we are climbing out of a very big hole. The output gap is deeply negative. De facto unemployment and underlying labor market losses are very, very high," said Merrill Lynch's Devalier. "I won't just extrapolate from the headline GDP forecasts about the state of economic activity and utilization."