Global slowdown no big worry now, but potential risk: Bank of Japan

Wednesday, 8 June 2011 00:00 -     - {{hitsCtrl.values.hits}}

TOKYO: The Bank of Japan sees recent signs of a global slowdown as a potential risk, but not significant enough to change its view that Japan’s economy will resume a moderate recovery from a post-earthquake slump by the end of this year.

The central bank, however, is aware that its forecast rests on shaky grounds with no guarantee that global growth will stay robust when Japanese exporters restore output to pre-quake levels in the autumn, people familiar with the BOJ’s thinking said.

While the BOJ does not peg its policy to any single data, the central bank sees its tankan business sentiment survey on July 1 as key in determining whether the economy needs support with further monetary easing, the sources say.

“If global growth continues to slow, it may weigh on Japan’s economy just when it starts to pick up on reconstruction-related demand,” one source said.

“It’s not a big risk now but something to watch out for.” The March 11 earthquake, tsunami and a radiation crisis at a crippled nuclear plant pushed Japan into its second recession in three years. Hopes that it will bounce back are pinned on solid global demand and hundreds of billions of dollars in reconstruction spending coming on stream later this year.

The political turmoil adds to the BOJ’s headaches as it may delay vast amounts of spending on rebuilding Japan’s ravaged northeast that should prop up capital spending and create jobs.

That means that while the BOJ will likely hold off on easing monetary policy at its rate review next week, it will keep its threshold for further loosening low. The central bank is unfazed by the recent string of disappointing economic data, such as last week’s poor US employment figures and slowing economic activity in China.  The BOJ has long been cautious about the US economic outlook, with its officials warning that its huge balance sheet problems will keep any recovery slow and patchy.  Its optimism that global economic growth will support Japan’s recovery is based mostly on expectations of strong growth in emerging nations, rather than the performance of US and European economies.

It also views the slowdown that several emerging economies are experiencing now as a healthy correction that should not burden Japan too much, at least for now. “Any slowdown in emerging economies will be moderate and even necessary to avoid a hard landing,” said another source familiar with the BOJ’s thinking.

In all, the central bank feels it is too early to conclude that the global economy is headed for a downturn severe enough to threaten its recovery scenario for the Japanese economy. That is not to say the BOJ is complacent to risks, including the fallout from the political turmoil in Japan.