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Bank of Japan cuts growth forecast but flags policy pause on recovery prospects

The Bank of Japan has warned its outlook was highly uncertain as the Covid-19 pandemic weighs on service-sector spending
The Bank of Japan has warned its outlook was highly uncertain as the Covid-19 pandemic weighs on service-sector spending

The Bank of Japan has today trimmed its economic and price forecasts for the current fiscal year.

But it offered a more upbeat view on the recovery outlook, signalling that it has delivered enough stimulus for the time being. 

The bank, however, warned the outlook was highly uncertain as the Covid-19 pandemic weighs on service-sector spending and a resurgence of infections in Europe dampen prospects for a sustained global recovery. 

As widely expected, the central bank kept monetary policy steady, including a -0.1% target for short-term interest rates and a pledge to guide long-term rates around 0%. 

The Bank of Japan also made no changes to a package of steps aimed at easing corporate funding strains, which has become its primary tool to deal with the pandemic-stricken economy. 

In a quarterly report on the outlook, the Bank of Japan trimmed its growth forecast for the current fiscal year ending March 2021 to a 5.5% contraction from a 4.7% slump projected in July, reflecting sluggish service spending during the summer. 

It also downgraded this fiscal year's core consumer price forecast to a 0.6% fall from a 0.5% drop seen in July. 

However, the Bank of Japan revised up its forecast for the next fiscal year beginning in April 2021 to a 3.6% increase, against a 3.3% expansion seen in July. 

It also upgraded its assessment on exports and output to say they were "increasing." That compared with the view in July, when it said they were falling sharply. 

"Japan's economy will likely improve as a trend as the impact of the coronavirus pandemic gradually subsides, though the pace of recovery will be moderate," the report said. 

"Risks to the economic and price outlook are skewed to the downside," it said, adding the bank's projections are based on the assumption that Japan can avert another lock-down triggered by a huge second wave of infections. 

Japan's economy is bottoming out after suffering its worst postwar slump in the three months from April to June, thanks in part to a rebound in exports and output. But weak consumption and capital spending is likely to keep any economic recovery modest, analysts say. 

While Bank of Japan Governor Haruhiko Kuroda has repeatedly vowed to ramp up stimulus if needed, a dearth of policy ammunition may mean there is not much the bank can do beyond rolling over its crisis-response programme or hope the government will deliver another spending package. 

Prime Minister Yoshihide Suga said today he would consider taking "budgetary steps" to support an economy hit by the pandemic, suggesting the chance of a third extra budget to fund new stimulus.