The Bank of Japan said Wednesday after its policy meeting that it expects the Japanese economy to shrink 4.7 percent and the consumer price index to fall 0.5 percent in fiscal 2020 through March 2021 due to the coronavirus pandemic.
The central bank decided to maintain its ultraeasy monetary policy to bolster the country’s economy, keeping short-term interest rates at minus 0.1 percent while guiding long-term rates at around zero percent.
Even though Japan has faced a far less deadly coronavirus outbreak than Europe and the U.S., a recent rise in Tokyo cases continues to weigh on sentiment and inflation has fallen below zero. The country’s manufacturers are also heavily reliant on demand from markets where the pandemic rages on.
In its previous quarterly economic and inflation outlook report released in April, the central bank projected the country’s economy will contract between 3 percent and 5 percent for fiscal 2020, with the inflation rate falling into negative territory between minus 0.3 percent and minus 0.7 percent.
The economy “has been in an extremely severe situation” with the impact of the coronavirus pandemic still being felt at home and abroad, the BOJ said in the latest quarterly report released after the policy meeting.
The central bank, however, forecasts the country’s economy will grow 3.3 percent in fiscal 2021, with expectations that economic activities will gradually return to pre-pandemic levels.
The BOJ decided to keep its corporate support measures totaling ¥110 trillion ($1 trillion), including interest-free loan programs for companies and corporate bond and commercial paper purchases introduced at its June meeting.
On the bank’s monetary policy, BOJ Gov. Haruhiko Kuroda and his Policy Board maintained interest rate and other monetary easing steps in line with a raft of policy measures introduced since March.
Sources said earlier that additional actions aren’t needed for now given that financial markets are relatively stable and companies aren’t facing significant funding problems. Recent data also signal the recession likely bottomed out last quarter.
“The BOJ will be sitting tight as the worst has passed with economic activities gradually picking up,” Yasuhide Yajima, chief economist at NLI Research Institute, said before the central bank’s decision. “Still, strengthening its funding programs is possible down the road as the economy is on an extremely weak footing.”
More than 90 percent of economists surveyed this month said the central bank has done enough or more than enough so far to support the economy. Some 63 percent now see the bank standing pat through 2020, up from 38 percent just last month.
While bankruptcies rose 6.3 percent in June from a year earlier and unemployment increased to 2.9 percent in May, the figures suggest that central bank and government efforts are helping to limit the damage from the crisis. The uptick in the jobless rate is far smaller than the spikes seen in other developed economies.
Still, the BOJ will continue monitoring the impact of the coronavirus on businesses, especially smaller ones that employ most of Japan’s workforce.
“A number of companies may not be able to absorb the shock from a decline in revenues,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “To prevent bankruptcies and unemployment, the BOJ will need to continue to take action for the funding of companies and the stability of financial markets.”
The European Central Bank is expected to hold policy settings when it meets on Thursday, signaling the end of initial crisis responses from the two major central banks.
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