Bank of Japan May Cut Economic, Price Outlook as Spending Falls

April 20 (Bloomberg) -- The Bank of Japan will probably cut its forecasts for the economy and prices next week as the recession takes a toll on spending by companies and households.

The world’s second-largest economy will probably contract 4.2 percent in the year to March 2010, more than twice the pace the central bank projected three months ago, according to the median estimate of 16 economists surveyed by Bloomberg News. Consumer prices excluding fresh food will tumble 1.3 percent, they said, also faster than the bank’s earlier estimate.

Governor Masaaki Shirakawa said this month that the economy has “underperformed” since January and weakening spending by companies and consumers will impair growth even as declines in exports and production moderate. Economists say Prime Minister Taro Aso’s record 15.4 trillion yen ($155 billion) stimulus package is unlikely to sustain a recovery.

“BOJ policy makers are expected to present a pretty cautious view of the economic outlook because the risk lingers that growth will stumble after being lifted temporarily by fiscal stimulus,” said Mari Iwashita, chief market economist at Daiwa SMBC Securities Co. in Tokyo. “The bank may place a big emphasis on the downside risks for the outlook.”

With the benchmark interest rate already at 0.1 percent, the bank will probably be forced to buy more debt issued by the government and companies to inject money into an economy heading for the worst recession since 1945, analysts said.

Policy Direction

The central bank releases the twice-yearly outlook on April 30 at 3 p.m. in Tokyo. The report will present board members’ forecasts for gross domestic product and consumer prices in the year ending March 2010 and the following 12 months. The semiannual reports, which are reviewed each January and July, also describe the bank’s policy direction.

In January, the board predicted the economy would shrink 2 percent this fiscal year before expanding 1.5 percent next year. Consumer inflation will tumble 1.1 percent this fiscal year and drop 0.4 percent in the next, it said.

The economists surveyed said GDP will grow 0.9 percent next fiscal year and core prices will fall 0.5 percent.

Shirakawa last week said the bank remains “cautious” about the outlook despite recent reports from China and the U.S. indicating the global economy may be beginning to recover.

“There are signs that economies are emerging from freefall at home and abroad, but it will take more than a year before Japan can return to a sustainable growth path,” said Teizo Taya, a former BOJ board member who now advises the Daiwa Institute of Research.

Production Plans

Japanese manufacturers planned to increase output in March and April, ending a five-month drop, a government report showed last month. Gauges of confidence among consumers, merchants and small businesses all rose in March.

Prime Minister Aso’s stimulus plan prompted Nomura Securities Co., Morgan Stanley and Nikko Citigroup Ltd. to raise their GDP forecasts for the current fiscal year, while adding that the measures would only provide a temporary boost.

The central bank will probably stick to its view that the economy will start to improve later this fiscal year, said Ryutaro Kono, chief economist at BNP Paribas in Tokyo.

“Even so, we expect growth won’t take root at least until late 2010 and the bank will eventually be forced to push back its prediction for a recovery.”

An unprecedented decline in exports has saddled manufacturers with too many workers and excessive capacity, the central bank’s quarterly Tankan survey showed on April 1, signaling more cuts in jobs and capital investment are likely.

Toshiba Cuts Jobs

Toshiba Corp. last week said it will cut 3,900 temporary jobs this fiscal year, on top of 4,500 eliminations announced in January. The chipmaker will also reduce research and development spending by 18 percent.

“Production capacity and employment are becoming excessive,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. “Investment and consumer spending continue to weaken and corporate failures may accelerate.”

The policy board will probably keep the benchmark overnight lending rate at 0.1 percent before releasing the outlook report, according to 15 of the 16 economists surveyed. One predicted a cut to a range of zero to 0.1 percent.