TOKYO (Reuters) – Japan’s economy will likely shrink at a slower pace than previously expected this fiscal year thanks to recovering exports, a Reuters poll found, offering relief for policymakers left with few tools to cushion the blow from the coronavirus.
But uncertainty over the pandemic’s fallout will continue to weigh on consumer prices and may put Japan on the cusp of mild deflation, over half of the analysts polled by Reuters said.
“The pace of recovery in demand, especially that for services, is weak. Continued slack demand will put downward pressure on prices,” said Saisuke Sakai, senior economist at Mizuho Research Institute.
The world’s third-largest economy is expected to shrink 5.6% in the current fiscal year ending in March 2021, the Nov. 5-11 poll showed, shallower than a 6.0% drop forecast last month.
November’s revision was largely due to a bigger-than-expected rebound in July-September gross domestic product (GDP) growth from a record slump suffered in the previous quarter.
“The level of economic activity remains low. But the rebound in July-September growth was faster than previously expected due to a pick-up in exports and consumption,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
“But a recent resurgence in coronavirus cases is a big risk for the economy. If that hurts economic activity again, growth in October-December may turn out to be weak,” he said.
The economy was forecast to grow an annualised 3.7% this quarter and 2.8% in the first quarter next year, after 18.9% growth in July-September, according to the poll of over 35 economists.
Growth for next fiscal year was pegged at 3.4%, unchanged from the previous poll. The government will release preliminary July-September GDP data on Nov. 16.
Japan has so far deployed two stimulus packages worth a combined $2.2 trillion to ease the pain from the health crisis, including cash payments to households and small business loans.
Prime Minister Yoshihide Suga has instructed his cabinet to come up with another package as the pandemic’s damage persists.
While the economy is showing initial signs of life, soft domestic demand continues to weigh on prices and push inflation further away from the Bank of Japan’s 2% target.
Of 35 economists polled, 20 said they expect the pandemic to add downward pressure on consumer prices.
Core consumer prices, which exclude volatile fresh food prices, will likely drop 0.5% in the current fiscal year, the poll showed, compared with a 0.4% fall projected in October.
About 64% of respondents said the BOJ’s next move would be to ramp up stimulus, as the health crisis drags on growth.
(Reporting by Kaori Kaneko; Polling by Shaloo Shrivastava, Editing by Leika Kihara and Sam Holmes)