The BOJ plans to revise its assessment of consumption and production downwards, sources told Reuters

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) – The Bank of Japan is expected to revise downward its assessment of consumption and industrial production this month, three people familiar with its thinking said, hinting at recent weak signs in the economy that underline the fragility of its recovery.

While this could fuel concerns about the political outlook, the sources said the BOJ is expected to maintain its forecast that the economy will continue to recover moderately, suggesting that the revisions are unlikely to dissuade it from phasing out its massive monetary stimulus to March or April.

“Consumption is not very strong and production is falling due to disruptions in automatic production,” a source said. “But there is no change in the view that the Japanese economy is recovering moderately,” the source added, an opinion also shared by the other two people.

The sources spoke on condition of anonymity because they were not authorized to speak publicly.

The council will discuss the assessment of the economy and its prospects, as well as the advisability of changing its ultra-expansionary policy, at its next meeting on March 18 and 19.

The BOJ currently describes consumption as “moderately growing” and production as “moving sideways.”

The sources added that the weakness in consumption and production will likely be temporary and will not derail Japan’s recovery, which will be driven by robust corporate profits and expectations of continued wage increases.

Big companies will conclude negotiations with unions on 2025 wages on March 13, ahead of the BOJ meeting on March 18 and 19. Economists expect wage increases of about 3.9% on average, compared to a 3.58% wage increase agreement reached in 2023 that was the highest in three decades.

BOJ Governor Kazuo Ueda said the central bank would focus on the outcome of wage negotiations, and whether companies will pass on rising labor costs by raising prices of services, in deciding how soon it will phase out stimulus.

“Although real wages may not immediately turn positive, there is hope that this year’s annual wage talks will yield solid results that would give a sustained boost to consumption,” Ueda told reporters last week when asked of recent weak data.

In setting monetary policy, the BOJ typically focuses more on the economy’s outlook, rather than past data.

RECENT DATA

The Japanese economy entered recession in the fourth quarter due to weak domestic demand, although recent data indicating strong capital spending will likely lead to an upgrade when revised gross domestic product data is released on the 11th. March.

Industrial production fell 7.5% in January from the previous month, the largest decline since May 2020, largely due to the halt in production to Toyota Daihatsu, the small car unit of Motor (NYSE:).

Household spending also fell 2.5% in December from a year earlier, extending its decline for a 10th month, due to the disruption in car supplies and continued declines in real wages.

In February, for the first time in three months, the Japanese government downgraded its view on the economy due to stagnant consumer spending, suggesting a bumpy path out of recession.

Sources, however, told Reuters the BOJ is on track to end its negative interest rate policy in the coming months on signs that companies will continue to offer bumper wages in a tight labor market.

With inflation running above the 2% target for more than a year and prospects for sustained wage growth, many market participants expect the BOJ to end its negative interest rate policy by April.