By Leika Kihara
TOKYO (Reuters) - The Bank of Japan is likely to make a rare projection this month that the world's third-largest economy will shrink this year, as the coronavirus pandemic threatens to push the country deep into recession, sources familiar with its thinking said.
It would be the first time the BOJ has forecast a full-year contraction since 2014, when a sales tax hike triggered an economic slump.
But the BOJ, in forecasts couched with unusually high levels of uncertainty, will cling to the view that after a severe downturn this quarter, Japan's economy will gradually rebound toward the end of this year, the sources said.
"Given what's happening now, it's hard to come up with a forecast of positive economic growth," one of the sources said.
"Any projection the BOJ makes shouldn't be too out of line with how the general public feels about the economy," another source said, a view echoed by two more sources.
There is no consensus within the BOJ yet on whether such a gloomy projection would warrant additional monetary easing, as much would hinge on how long it takes for the pandemic to be contained, they said.
The sources spoke on condition of anonymity due to the sensitivity of the matter. The BOJ could not be reached for comment.
The BOJ will release fresh quarterly growth and price projections at its next rate review on April 27-28.
In its last projections made in January, it expected the economy to grow 0.9% in the year that began in April.
WORSE THAN 2009
A new Reuters poll showed analysts expect the economy to shrink 2.1% this year as the outbreak wreaks havoc on business and daily life, with a majority projecting the BOJ will ramp up stimulus in April.
The economy is forecast to shrink by an annualised 3.7% in January-March and 6.1% in April-June, the poll showed, after a sharp contraction late last year.
Japanese Prime Minister Shinzo Abe on Tuesday declared a state of emergency to fight a rise in coronavirus infections in major population centres and rolled out a nearly $1 trillion stimulus package to soften the economic blow.
The BOJ expanded monetary stimulus in an unscheduled policy meeting on March 16 to ease corporate funding strains and calm financial markets jolted by the health crisis. It pledged to buy more risky assets such as such as exchange-traded funds (ETF)
and ramp up buying of commercial paper and corporate bonds to keep credit markets from freezing up.
Uncertainty over how long it would take to contain the virus is making it difficult for policymakers to come up with growth projections, stoking market speculation the BOJ may not even produce them at the April rate review.
While the hit to consumption from the crisis points to a deep recession, the BOJ is seen counting on the boost from the government's stimulus package and early signs of a rebound in China's economy to ease the pain, they say.
"It's impossible now to credibly project what could happen to Japan's economy this year, as everything depends on how things unfold regarding the pandemic," said former BOJ executive Kazuo Momma.
"But I won't be surprised if the economy contracts by more than 5%," given the immediate hit to households and companies, said Momma, currently an economist at Mizuho Research Institute.
In forecasts produced in April 2009 during the global financial crisis, the BOJ projected a 3.2% contraction for fiscal 2008 and a 3.1% decline the following year.
"A forecast of a 5% contraction would be quite shocking, so the BOJ won't go that far. But it may produce an estimate of 2-3% negative growth," said a former BOJ board member, who declined to be identified due to the sensitivity of the matter.
(Reporting by Leika Kihara; Editing by Kim Coghill)