Bank of Japan : Outlook for Economic Activity and Prices (October 2020, full text)

Not to be released until 2:00 p.m.

Japan Standard Time on

Friday, October 30, 2020.

Outlook for Economic Activity and Prices

October 2020

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

Please contact the Bank of Japan at the address below in advance to request permission when reproducing or copying the content of this document for commercial purposes.

Secretariat of the Policy Board, Bank of Japan

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

Please credit the source when quoting, reproducing, or copying the content of this document.

Outlook for Economic Activity and Prices (October 2020)

The Bank's View1

Summary

• Japan's economy is likely to follow an improving trend with economic activity resuming and 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. 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 July Outlook Report, the projected growth rate is lower for fiscal 2020, mainly due to a delay in recovery in services demand, but is somewhat higher for fiscal 2021 and more or less unchanged for fiscal 2022. 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 COVID-19 will not spread again on such a large scale that the wide-ranging public health measures will need to be reinstated. It also is based on the premises that, 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. 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 October 28 and 29, 2020.

1

I. Current Situation of Economic Activity and Prices in Japan

Japan's economy has picked up with economic activity resuming, 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 from a state of significant depression. In this situation, exports and industrial production have increased. On the other hand, business fixed investment has been on a declining trend, against the background of deterioration in corporate profits. With the continuing impact of COVID-19, the employment and income situation has been weak. Private consumption has picked up gradually on the whole, although consumption of services, such as eating and drinking as well as accommodations, has remained at a low level. Housing investment has declined moderately. Public investment has continued to increase moderately. Meanwhile, business sentiment deteriorated significantly but subsequently has improved somewhat. 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 slightly 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 economic activity resuming and the impact of COVID-19 waning gradually, is likely to follow an improving trend, supported by 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. 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 assumptions that, with progress in efforts to take preventive measures against COVID-19 and improve economic activities simultaneously, COVID-19 will not spread again on such a large scale that the wide-ranging public health measures will need to be reinstated, and that the impact of COVID-19 will 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.

Looking at the outlook for economic activity based on the assumptions and premises in more detail, overseas economies are likely to continue improving, partly supported by aggressive macroeconomic policies, but the pace is expected to be only moderate while

2