Bank of Japan May Cut Economic Forecasts, Keep Rate at 0.1%

By Keiko Ujikane

April 30 (Bloomberg) -- The Bank of Japan will probably cut its economic and price forecasts and keep the benchmark interest rate at 0.1 percent at a policy meeting today.

The world’s second-largest economy will 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.

Japan is heading for its worst recession since World War II as a collapse in demand from abroad spreads to the nation’s businesses and consumers. Still, the Bank of Japan will probably resist adding to its program of buying corporate and government debt at today’s meeting, said Yasuhide Yajima.

“Without doubt, Japan’s deterioration will force the central bank to downgrade its outlook,” said Yajima, senior economist at NLI Research Institute Ltd. in Tokyo. “The BOJ probably wants to examine the impact of its measures on the economy and markets at this point.”

Governor Masaaki Shirakawa and his policy board will leave the overnight lending rate at 0.1 percent before releasing the outlook report, according to 15 of the 16 economists. One predicted a cut to a range of zero to 0.1 percent.

The central bank will probably announce the rate decision by early afternoon in Tokyo before publishing the outlook at 3 p.m. The board releases its twice-yearly outlook in April and October and reviews it each January and July.

Consumer prices excluding fresh food will tumble 1.3 percent this fiscal year, economists said, sharper than the 1.1 percent decline that the policy board predicted in January.

Asset Purchases

Since cutting the key rate in December, the bank has been buying corporate debt and stocks to channel cash to companies struggling to raise funds amid the recession. It has also increased its monthly purchases of government bonds.

The government cut its economic forecasts this week, predicting a 3.3 percent contraction in the current fiscal year amid record declines in exports and corporate spending.

Confidence at large manufacturers fell to a record low in March, the central bank’s Tankan survey showed this month. Managers said they have too many workers and spare capacity, signaling more cuts in jobs and capital investment are likely.

Teijin Ltd., a carbon-fiber maker, said this week that it will eliminate 2,500 jobs, slash capital spending by half and lower executives’ salaries by 20 percent.

Japan’s unemployment rate probably climbed to a four-year high of 4.6 percent in March and household spending slumped for a 13th month, economists expect reports will show tomorrow.

Stimulus Plan

Prime Minister Taro Aso this month unveiled a record 15.4 trillion yen ($160 billion) stimulus package to support the economy amid faltering export demand. The 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.

“It’ll take time before Japan gets out of the recession,” said Yasuhiro Onakado, chief economist at Daiwa SB Investments Ltd. in Tokyo. “Companies may cut workers and curb business investment, offsetting any positive effect from the stimulus.”

The economy shrank at an annual 12.1 percent pace in the last three months of 2008 and analysts expect a similar rate of contraction in the first quarter.

Still, recent reports indicate the worst of the slump may be over. Exports rose in March from February on a seasonally adjusted basis, the first month-on-month gain since May 2008. Confidence among merchants and consumers climbed in March.

The central bank’s likely forecast cut “is essentially just a number-crunching exercise to catch up with the slump in GDP in the last two quarters,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London. “The real news is the recent stabilization in the monthly economic data, which bodes well for the prospects of an early recovery.”

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net Mayumi Otsuma in Tokyo at motsuma@bloomberg.net