Japan heads for Q3 rebound but pressure on BOJ, Abe may build

TOKYO, Aug 14 (Reuters): Japan's economy is expected to rebound this quarter from a steep contraction, but looming challenges will keep the pressure on the government and central bank for action to sustain growth.
Economists expect annualised growth of about 4 per cent for the three months to September after data on Wednesday showed that an April sales tax hike pushed the world's third-biggest economy into a 6.8 per cent drop in the second quarter.
The worst decline since the 2011 earthquake and tsunami highlights the growing gap between the bullish Bank of Japan and sceptical financial markets, even though it did not derail the BOJ and government scenario that the economy is recovering moderately and will not push the central bank into immediate action.
With exports disappointingly weak, inventories building, consumption sluggish and capital spending in question, the central bank may find it harder to argue that its massive stimulus will pull Japan out of 15 years of deflation.
Pressure could also build on Prime Minister Shinzo Abe in coming months to veto a planned further tax hike.
"We can't ignore the effect the big economic contraction in April-June has on the BOJ's economic and price projections," said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
Even after trimming its forecasts last month, the BOJ expects expansion of 1.0 per cent for the fiscal year through March, well above the 0.3-0.5 per cent expectations of private economists. None of the analysts in Reuters surveys over recent months, moreover, expect the BOJ will reach its goal of 2 per cent inflation next fiscal year.
BOJ Governor Haruhiko Kuroda has been relentlessly bullish, sticking to his inflation target last week on the grounds that a positive cycle - strong corporate profits boosting business investment and wages, thereby supporting personal spending - remains intact.
Many economists, such as Muguruma, expect the central bank will have to cut its GDP forecast in a half-yearly assessment on Oct. 31, nudging it into expanding its enormous purchases of government bonds and other assets.
Others believe the BOJ will not be forced into action given that labour markets are tightening and business sentiment is holding up.