TOKYO- Japan’s government cut this year’s economic growth forecast but expects inflation to sharply exceed the central bank’s 2 percent target in new projections released on Thursday, acknowledging growing signs of change in the country’s deflationary mindset.
In a mid-year review of its forecasts, the government expects the economy to expand 1.3 percent in the current fiscal year ending in March 2024, down from 1.5 percent projected in January. It expects the economy to grow 1.2 percent in fiscal 2024.
“While slowing exports will likely drag on growth, consumption is seen recovering mainly for services. Capital expenditure is also expected to increase,” the government said.
Japan’s government forecast inflation sharply exceeding the central bank’s 2 percent target this year, acknowledging broadening price rises that may keep alive market expectations of an end to ultra-low interest rates.
The estimates come ahead of closely watched Bank of Japan policy meeting next week, when the board will revise its quarterly forecasts and debate progress on sustainably meeting its price target.
In its mid-year review, the government expects overall consumer inflation to hit 2.6 percent for the fiscal year that began in April, up sharply from 1.7 percent projected in January. Inflation last year was 3.2 percent.
The government projects inflation to slow next fiscal year but, at 1.9 percent, stay close to the central bank’s target.
“The government’s inflation forecasts are well in line with market forecasts. It wouldn’t surprise me if the BOJ revises up its price projections this month,” said Masamichi Adachi, an economist at JPMorgan Chase.
Underscoring the fragile nature of Japan’s recovery, the government slashed its economic growth forecast for this fiscal year. It expects the economy to expand 1.3 percent this fiscal year, below the 1.5 percent estimated in January, due to a hit to exports from slowing global demand.
“Japan’s economy is recovering moderately” with positive signs emerging, such as steady wage hikes and strong corporate spending appetite, Prime Minister Fumio Kishida said.
“It’s important to ensure Japan makes steady progress in exiting deflation, and shift to a society where wage hikes become a norm,” he told the government’s top economic council.
In its most recent forecasts made in April, the central bank expects core consumer inflation – which strips away the effect of fresh food costs – to hit 1.8 percent in the current fiscal year and 2.0 percent in the following year.
BOJ Governor Kazuo Ueda has brushed aside the chance of a near-term exit from ultra-loose policy, arguing that the recent cost-driven rise in inflation must be replaced by price gains driven more by robust domestic demand and higher wage growth.
Japan’s economy grew more than initially thought in January-March, revised data showed on Thursday, as a post-pandemic pickup in domestic spending and company restocking helped offset the hit to exports from slowing global demand.
With inflation running at a four-decade high, further growth in the world’s third-largest economy will depend on sustained wage hikes, which the Bank of Japan and the government regard as core policy objectives.
Japan’s gross domestic product (GDP) expanded an annualised 2.7 percent in January-March, much higher than a preliminary estimate of a 1.6 percent growth and economists’ median forecast for a 1.9 percent rise.
The figures also revised out a technical recession reported for the second half of last year, defined as two consecutive quarters of contraction. The revised data showed GDP rose 0.4 percent in October-December, following a 1.5 percent contraction in July-September.
The January-March expansion translates to a 0.7 percent quarter-on-quarter rise, data released by the Cabinet Office showed, against a preliminary reading of 0.4 percent and economists’ forecast for a 0.5 percent increase.
Companies’ work-in-progress inventories, particularly among automakers and semiconductor equipment firms, and capital expenditure rose faster than previously reported, contributing to the upward GDP revision.
Capital spending rose 1.4 percent, upgraded from 0.9 percent and roughly in line with Ministry of Finance data last week that showed manufacturers’ business spending grew at the fastest rate since 2015. – Reuters
