Exclusive: Unfazed by pandemic, Bank of Japan to keep economic recovery view – sources

TOKYO (Reuters) – The Bank of Japan is likely to maintain this month its projection that the economy will gradually recover from the damage wrought by the coronavirus pandemic in the latter half of this year, sources said.

Such a view would reinforce market expectations that it will forgo bold monetary policy easing at this month’s rate review, after the BOJ and the government unveiled a slew of support measures for businesses in the last few months.

But it would contrast with the European Central Bank’s move on Thursday to offer a bigger-than-expected expansion of its stimulus package to prop up the economy.

The BOJ’s optimism reflects its growing conviction the world’s third-largest economy has hit bottom in April or May, when lockdown steps kept citizens home and businesses shut, said four sources familiar with the central bank’s thinking.

“There aren’t enough factors that would force the BOJ to alter its view the economy will emerge from the doldrums in latter half of this year as the pandemic subsides,” one of the sources said, a view echoed by three other sources.

That view would reduce the likelihood of interest rate cuts or a massive increase in asset purchases at the BOJ’s June 15-16 rate review.

Still, many central bankers warn of risks that could crimp growth such as a renewed spike in infections, rising job losses and a bigger-than-expected slump in emerging economies.

“The April-June quarter is probably the bottom for Japan’s economy. But the slump in growth may become bigger and the rebound slower than initially thought,” a second source said.

While Japan lifted lockdown measures in May, analysts expect the economy to suffer an annualised 22% contraction in the current quarter and recover only modestly in the second half of this year.

The BOJ eased monetary policy for two straight months in April, joining government efforts to cushion the blow from the pandemic on an economy already sliding into deep recession.

The steps taken so far have focused on easing corporate funding strains, such as increased purchases of corporate debt and the creation of lending facilities targeting small firms.