Bank of Japan Said to Watch El Nino for Summer Spending
Bank of Japan officials are concerned that cooler-than-normal weather triggered by El Nino this summer will curb spending and weigh on an economic rebound after a sales-tax increase, according to people familiar with the matter.
The officials are watching out for potential weakening in consumer spending and sentiment that could add to risks facing the economy from weak exports and developments in Ukraine, according to the people, who asked not to be named because the discussions were private. With an export recovery that could be gradual, the effects of El Nino require close monitoring, the people said.
The Japan Meteorological Agency this week forecast a 70 percent chance El Nino will occur, the highest since its last occurrence in 2009, bringing lower temperatures that could continue through autumn. Dai-ichi Life Research Institute economist Toshihiro Nagahama sees a risk that cooler weather could reduce growth by as much as 0.9 percentage point in the third quarter.
“We can’t rule out the potential that the El Nino this summer causes unexpected damage to Japan’s economy,” Nagahama said. “This could affect the decision to raise the sales tax from October next year as the growth rate in July-September is critical for that judgment.”
Cold weather triggered by El Nino could depress consumer spending on summer clothes, air conditioners, beer and other drinks, weighing on growth, Nagahama said.
Average monthly temperatures in Tokyo during the El Nino from May 2009 to March 2010 were 0.2 degrees Celsius lower than the 30-year average, according to data from Japan’s weather agency. Beer shipments by such companies as Kirin Holdings (2503) Co. and Asahi Breweries Ltd in July 2009 were the lowest for that month since records began in 1992, as colder weather and heavy rains deterred drinkers.
The risk for Prime Minister Shinzo Abe and the central bank is that the damage could sap strength from a bounce in an economy forecast to return to growth in the third quarter after shrinking an annualized 3.3 percent this quarter due to the effects of the sales tax increase, according to a May 2-8 survey of economists by Bloomberg News
The government, trying to contain the world’s biggest debt burden, last month lifted the tax to 8 percent from 5 percent and will base a decision on whether to go ahead with plans to raise the levy to 10 percent next year on how resilient the economy is in the third quarter, according to Economy Minister Akira Amari.
El Nino this summer could be the strongest since a record in 1997, according to Shuhei Maeda, senior coordinator for El Nino information at Japan’s weather agency.
El Nino refers to a periodic warming cycle in the central and eastern tropical Pacific Ocean which can lead to major weather pattern shifts, including cooler-than-normal sea surface temperatures in the western Pacific. This can cause lower temperatures, higher rainfall, and less sunlight in Japan when it occurs during the northern hemisphere summer, according to Japan’s weather agency.
The projected slump in the economy this quarter adds to headwinds for the central bank, which is trying to generate 2 percent inflation in the world’s third-biggest economy with unprecedented easing.
A separate Bloomberg survey conducted May 2-8 showed that Governor Haruhiko Kuroda was failing to convince economists that the BOJ has done enough to reach its target. Nearly all the economists surveyed said the central bank will miss its goal in the fiscal year starting next April, with 75 percent forecasting more stimulus by the end of the year.
The economy is showing some signs of shaking off the tax increase. While sentiment among taxi drivers and restaurant staff and other workers slumped in April, a gauge of confidence in the economy two to three months ahead soared by the most in data back to 2000, the Cabinet Office said this week.
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