Bank of Japan Releases Bleak Forecast
For Economy, Leaves Policy Unchanged
By PHRED DVORAK
Staff Reporter of THE WALL STREET JOURNAL
TOKYO -- Japan's central bank substantially lowered its forecasts for economic growth this year and next, and predicted steeper price deflation, in a signal the bank might further ease credit.
Monday's revisions, which came on the same day the government announced a record fall in industrial production, also mark the first major acknowledgment by authorities that Japan's economy is in dire trouble.
The Bank of Japan revised its core forecasts to show the economy shrinking between 0.9% and 1.2% in the year ending March 31, a reversal from predictions of 0.3% to 0.8% growth released seven months ago. The change in outlook brings the central bank in line with estimates by private-sector economists, and puts it a step ahead of the government, which still hasn't revised its forecast of 1.7% growth for the fiscal year.
What's more, the central bank said it expected declining demand for Japanese goods overseas would keep economic output weak in the year starting April 1, with estimates ranging from a contraction of 1.1% to growth of 0.1%. Japan is already expected to fall into recession during the July-September quarter under the technical definition of recession as back-to-back quarterly contractions, and the bank's revised outlook suggests that the recession could be prolonged.
The pessimism was underscored by a separate government report showing industrial production fell 2.9% in September from August, and plunged 12.7% from September 2000 -- the largest drop since 1995, the base year for current calculations.
The bank also signaled there was no end in sight to deflation, forecasting falls for both consumer and wholesale prices this year and next. That is particularly significant because the Bank of Japan has linked its current ultraeasy monetary policy to the consumer-price index, saying it won't tighten credit until the index stops falling. The index has already fallen for 24 straight months through September, feeding a growing call for more-radical deflation-fighting measures by the central bank. Those measures range from having the central bank set a positive target for inflation to pumping up the money supply and weakening the yen by buying dollars.
Yet the bank's policy-setting board decided not to take any further action at its Monday meeting, highlighting the policy bind in which the country finds itself as it slides deeper into its slump. Central bankers argue that the bank is already doing all it can to help the economy by keeping interest rates at virtually zero and flooding the money markets with trillions of yen more than banks -- and their borrowers -- want.
But the Ministry of Finance also says it has exhausted its ability to prime the pump through extra government spending, because the administration of Prime Minister Junichiro Koizumi has said it wants to keep bond issuance capped at 30 trillion yen ($244.41 billion) to rein in a ballooning national debt. The ministry has already proposed a small supplementary stimulus budget that keeps bond issuance within that limit, but many politicians and economists are saying the government needs to spend much more money to keep the economy afloat. |
