(Bloomberg) -- The Bank of Japan stood pat on policy but trimmed its economic forecast for the current year as rising waves of the coronavirus abroad cloud the recovery outlook and spark renewed nerves in markets.
The BOJ kept its key interest rates and asset purchases unchanged, according to a statement from the central bank Thursday. All but one of 43 surveyed economists forecast the result.
The bank cut its growth forecast for the year ending in March to a 5.5% contraction from a 4.7% drop, citing a delayed recovery in the services sector. It raised its growth projection for the following year to 3.6%. Amid renewed concern over the trajectory of the pandemic, it said the outlook for the economy was extremely unclear.
The decision to hold on policy likely reflects signs of a recovery from a record contraction as production and exports improve. Still, the BOJ stated its readiness to take further action if needed. Ramped-up asset buying has helped keep markets relatively stable while around $1 trillion in loan programs has ensured struggling firms can access credit rather than going bust.
A resurgence of the virus in the U.S. and Europe is increasing the risks for Japan’s export-reliant economy. A return to partial lockdowns in some parts of Europe and the prospect of an even more prolonged pandemic are helping fuel stock market falls and further yen gains.
The yen was trading largely unchanged at 104.48 against the dollar following the decision. The currency this week strengthened to a five-week high against the greenback amid concern over the impact of the worsening pandemic on global economic activity. The Nikkei 225 stock index was down around 0.4% after the start of the afternoon trading session, paring earlier losses.
What Bloomberg’s Economist Says
“While the reflation effort is on the back burner for now, the central bank continues to face serious challenges, with the economy still struggling from the virus impact and recent readings on core inflation below zero.”
--Yuki Masujima, economist
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The decision comes just hours before the European Central Bank is set to deliver its own policy decision. The ECB is expected to hold fire, while signaling more stimulus in the works to combat the impact of the virus’s recent spread, though speculation is growing that it may move early.
While Japan has had far fewer virus cases than many other developed countries, the surge in Europe and the U.S. casts a shadow over the outlook.
“The BOJ is definitely keeping its guard high,” economist Hirofumi Suzuki at Sumitomo Mitsui (NYSE:SMFG) Banking Corp. said before the BOJ decision. “There are so many uncertainties, from the impact of rising virus cases in Europe to the outcome of the U.S. presidential election.”
While the number of bankruptcies is actually down from last year and the jobless rate has remained low at 3% for now, an increasing number of Japanese companies are showing signs of stress. Hitachi (OTC:HTHIY) Metals Ltd. said Tuesday it will cut 3,200 jobs. Airline ANA Holdings Inc. forecast its biggest-ever operating loss and reportedly plans to slash pay for 15,000 employees by 30%.
The pressure on companies will intensify if the pandemic intensifies and the timeline for containment lengthens.
On inflation, the bank trimmed its forecast for this fiscal year, citing the impact of government-sponsored discounts on travel packages to help regional economies and the tourism industry.
Inflation is running far below the BOJ’s 2% target, but the bank’s priorities now are keeping credit lines open to companies and maintaining market stability. The BOJ hasn’t announced any major new stimulus since April. Its virus-fighting measures include funding programs worth about $1 trillion and expanded asset purchases.
(Adds market reaction and more details from statement.)
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