By Leika Kihara
TOKYO (Reuters) – The Bank of Japan is expected to offer a more upbeat view of the economy at this month’s rate review than it did last month, people familiar with the matter said, as robust exports and factory output support recovery in the world’s third-largest economy.
But the central bank will stress its resolve to maintain its massive monetary stimulus, as the export-driven recovery has yet to boost private consumption and inflation, the sources told Reuters.
“The economy is doing quite well. The problem is it’s not translating into higher prices,” one of the sources said, conceding that underlying inflation remains “surprisingly weak”.
“Exports and output are gathering momentum,” another source said, adding that a recent slew of positive data has heightened the chance the BOJ will upgrade its economic view.
Last month, the BOJ said Japan’s economy is “recovering moderately as a trend.” The central bank will likely remove the phrase “as a trend” to signal its confidence that the recovery is gaining momentum, the sources said.
The BOJ is also likely to offer a more optimistic view on exports and output than in March, when it said they were “picking up,” the sources said.
The BOJ is widely expected to keep monetary settings unchanged at its two-day rate review that ends April 27. At the meeting, it will also review its quarterly projections and its assessment of economic and price developments.
INFLATION REMAINS WEAK
Japan’s economy has shown signs of life, as a rebound in overseas demand helped exports grow by the fastest pace in more than two years in February.
Analysts polled by Reuters expect exports to rise for a fourth straight month in March.
Factory output rose at its fastest pace in eight months in February and job losses hit a two-decade low, a sign the economy was running at near full-capacity mainly on external tailwinds.
An estimate by the BOJ showed the output gap, which turns positive when an economy’s demand exceeds supply, posted its first positive reading in seven quarters in October-December.
But core consumer prices rose just 0.2 percent in February from a year earlier, casting doubt on the BOJ’s forecast that the economic recovery will prod firms to raise prices and wages.
An index stripping away the cost of energy showed consumer inflation stood at 0.1 percent in February, suggesting that companies remain wary of raising prices for fear of scaring away cost-savvy consumers.
The BOJ now projects core consumer inflation to hit 1.5 percent in the current fiscal year ending in March 2018, and accelerate to 1.7 percent the following year.
Some analysts say the BOJ will be forced to slash the price forecasts, which far exceed private-sector projections of around 1 percent.
“The BOJ’s price forecasts are too optimistic, so there’s a very high chance they will be revised down. This may happen at its next quarterly forecast review in April,” said Kazuo Momma, a former top BOJ economist.
(Additional reporting by Sumio Ito and Yoshifumi Takemoto; Editing by Sam Holmes)