Bank of Japan warns of overseas uncertainty, weak IT demand

11 Oct, 2011, 12.40PM IST, Reuters

TOKYO: Bank of Japan on Tuesday stuck to its view that overseas growth will remain firm but warned the outlook was highly uncertain, with some companies already complaining that the global slowdown was weighing on their exports.

US balance sheet problems, financial market turmoil driven by Europe’s debt woes, and monetary tightening in emerging nations have led to a slowdown in global growth, the central bank said in its monthly economic report for October.

“As for the outlook, global growth will remain firm as a trend driven by emerging economies, even as growth slows mainly in the United States and European nations. But the outlook is highly uncertain,” it said.

The assessment was in line with a BOJ statement issued after last week’s rate review but the report offered a more detailed description of how it views the risks to overseas economies.

The BOJ kept monetary policy on hold last Friday and maintained its view that Japan’s economy will recover moderately, supported by reconstruction spending following the March earthquake and by the resilience of emerging markets.

But Governor Masaaki Shirakawa warned that the country’s recovery faces mounting threats from Europe’s sovereign debt woes and the slowdown in global growth.

Some in the BOJ are increasingly worried that Japan’s economy may lose support from global demand just as it recovers from the quake’s damage. They may therefore call for further monetary easing when the BOJ board next meets on Oct. 27 and issues new long-term growth projections in a twice-yearly outlook report.

A major revision to its recovery scenario for Japan’s economy would heighten the case for additional monetary easing, sources familiar with the BOJ’s thinking have said.

SLOWER PACE In the monthly report, the BOJ said Japanese output would continue climbing in the fourth quarter but at a slower pace than in July-September.

While automobile exports will keep rising as car makers restock depleted inventories overseas, global demand for Japanese electronic parts will be weak for the time being as sales of personal computers and television sets slacken, it said.

“Some companies are saying that the global slowdown is starting to affect their export orders,” the BOJ report said.

“That is why we need to watch out for downside risks mainly in the electronic parts industry, which is facing inventory adjustments.”

Japan is expected to have emerged from recession in the third quarter as companies restored supply chains severed by the quake and after business sentiment turned positive in the quarter.

Consumer confidence improved in September as share prices managed to stabilise after steep falls in the previous two months, a government survey showed on Tuesday, suggesting a steady recovery from the March disaster.

But slowing global growth and the strength of the yen, which hit a record high against the dollar in August, have started to weigh on exports and output, casting doubt on how much Japan can rely on overseas demand to boost its economy.

The Cabinet Office said on Tuesday that the service sector sentiment index fell for a second month in a row in September, due in part to the impact of the strong yen.

The BOJ will likely cut its GDP forecasts in the semi-annual report due on Oct. 27, sources said, while projecting that core consumer inflation will stay below the 1 per cent threshold that it sees as desirable price growth until the year to March 2014 — signalling that it will keep interest rates ultra-low until then.

A major overhaul in its projections may give the BOJ justification to ease policy again, particularly if there is more evidence that the economy is losing momentum or if the yen rallies again against the dollar, analysts said.

The central bank announces its assessment of the overall economy in a statement after each rate review. It issues a more detailed assessment in a monthly economic report, usually due out the following market day.

The BOJ loosened policy in August by expanding its asset buying scheme, aiming to forestall potential risks to Japan’s economy such as damage from a strong yen and slowing overseas growth. It has stood pat on policy since then

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