Bank of Japan : Outlook for Economic Activity and Prices (January 2021, full text)

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Friday, January 22, 2021.

Outlook for Economic Activity and Prices

January 2021

(English translation prepared by the Bank's staff based on the Japanese original)

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Secretariat of the Policy Board, Bank of Japan

P.O. Box 30, Nihonbashi, Tokyo 103-8660, Japan

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Outlook for Economic Activity and Prices (January 2021)

The Bank's View1

Summary

• Japan's economy is likely to follow an improving trend with the impact of the novel coronavirus (COVID-19) waning gradually, but the pace is expected to be only moderate while vigilance against COVID-19 continues. Specifically, downward pressure stemming from the impact of a resurgence of COVID-19 is likely to remain strong for the time being, particularly in face-to-face services consumption. Thereafter, as the impact subsides globally, the economy is projected to keep improving further with overseas economies returning to a steady growth path.
• The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is likely to be negative for the time being, mainly affected by COVID-19, the past decline in crude oil prices, and the "Go To Travel" campaign. Thereafter, it is expected to turn positive and then increase gradually, since downward pressure on prices is projected to wane gradually along with economic improvement and the effects of such factors as the decline in crude oil prices are likely to dissipate.
• Compared with the previous projections in the October Outlook Report, the projected growth rates are somewhat higher, mainly for fiscal 2021, reflecting the effects of the government's economic measures in particular. The projected rates of increase in the CPI are more or less unchanged.
• The outlook for economic activity and prices provided in this Outlook Report is extremely unclear, since it could change depending on the consequences of COVID-19 and the magnitude of their impact on domestic and overseas economies. The outlook is based on the assumption that the impact of COVID-19 will wane gradually and then almost subside toward the end of the projection period. It also is based on the premises that, while the impact remains, firms' and households' medium- to long-term growth expectations will not decline substantially and the smooth functioning of financial intermediation will be ensured with financial system stability being maintained. However, the assumption and premises entail high uncertainties.
• With regard to the risk balance, risks to both economic activity and prices are skewed to the downside, mainly due to the impact of COVID-19.

1 "The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on January 20 and 21, 2021.

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I. Current Situation of Economic Activity and Prices in Japan

Japan's economy has picked up as a trend, although it has remained in a severe situation due to the impact of COVID-19 at home and abroad. Overseas economies also have picked up, although the impact of the resurgence of COVID-19 has been seen in part. In this situation, exports and industrial production have continued to increase. In addition, corporate profits and business sentiment deteriorated significantly but subsequently have improved gradually. Business fixed investment has stopped declining on the whole, albeit with variations across industries. The employment and income situation has remained weak due to the impact of COVID-19. Private consumption has picked up gradually as a trend, but downward pressure has increased recently on consumption of services, such as eating and drinking as well as accommodations. Housing investment has declined moderately. Public investment has continued to increase moderately. Financial conditions have been accommodative on the whole but those for corporate financing have remained less so, as seen in weakness in firms' financial positions. On the price front, the year-on-year rate of change in the CPI (all items less fresh food, and the same hereafter) has been negative, mainly affected by COVID-19, the past decline in crude oil prices, and the "Go To Travel" campaign. Inflation expectations have weakened somewhat.

1. Baseline Scenario of the Outlook for Economic Activity and Prices in Japan A. Baseline Scenario of the Outlook for Economic Activity

Japan's economy, with the impact of COVID-19 waning gradually, is likely to follow an improving trend, supported by a recovery in external demand, accommodative financial conditions, and the government's economic measures. However, the pace of improvement is expected to be only moderate while vigilance against COVID-19 continues. Specifically, downward pressure stemming from the impact of the resurgence of COVID-19 is likely to remain strong for the time being, particularly in face-to-face services consumption. Thereafter, as the impact subsides globally, the economy is projected to keep improving further with overseas economies returning to a steady growth path.

This baseline scenario is based on the assumption that, while taking preventive measures against COVID-19 and improving economic activity simultaneously, the impact of COVID-19 will wane gradually and then almost subside toward the end of the projection period. The outlook also is based on the premises that, in Japan, while the impact of COVID-19 remains, firms' and households' medium- to long-term growth expectations will not decline substantially and the smooth functioning of financial intermediation will be ensured with financial system stability being maintained.

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