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Bank of Japan weighs gloomier view of exports and output

Stance on overall economy likely unchanged, with China stimulus expected

Newly assembled Subarus await shipment at a port in Yokohama, Japan. Japan's exports dropped 5.2% in real terms from the previous month in January.   © Reuters

TOKYO -- The Bank of Japan appears poised to cut its assessments of exports and industrial production during this week's policy meeting, a change driven largely by China's economic slump.

"We have no choice but to recognize that recent export and production trends are weak," said a top official at the central bank, a view echoed by other senior officers there. In January, exports dropped 5.2% from the previous month in real terms, according to BOJ data, and the economy ministry's index of industrial production shrank for a third straight month.

The central bank said at its January policy meeting that both exports and industrial production were "on an increasing trend," but it is considering revising that language during the two-day meeting ending Friday.

China's economic slowdown and Sino-U.S. trade frictions are major factors, along with a correction in the tech sector. "China's regional economies have been decelerating because of the crackdown on shadow banking," said a source at the BOJ.

"The downside risks to the global economy are gradually gaining strength," a senior central bank official said.

Despite these warning signs, the BOJ is expected to maintain the stance that Japan's economy is "expanding moderately."

For one, the central bank reasons that the once-choppy financial markets have calmed down. Although global equity prices slid sharply around the start of the year, the U.S. Federal Reserve's signal in late January that it was done raising rates for the time being was warmly received by markets. The move brought the U.S. more in line with dovish tendencies elsewhere, including at the European Central Bank.

The Fed's pronouncement also eased concerns about emerging economies that have had to contend with capital flight. In Japan, the yen was recently trading at about 111 per dollar, a level projected to prop up Japanese corporate earnings.

Furthermore, the BOJ expects Chinese stimulus measures to start bearing fruit in the second half of 2019. That would help drive improvement in the global economy.

"Japan's economic indicators could potentially show weak numbers until around June, but a recovery is likely during the July-September quarter," said a source at the central bank.

The BOJ sees prices maintaining their upward momentum, so it is not expected to make major changes to its monetary policy or overall economic assessment. For now, the question is whether the dips in exports and industrial output will prove lasting.

Japan's composite index for economic conditions fell for a third straight month in January, the Cabinet Office reported last Thursday. The reading suggests the economy is in recession, but Chief Cabinet Secretary Yoshihide Suga said the economy is still on a moderate recovery path.

The BOJ has only January's data to work with now, but it will scrutinize coming statistics for the first calendar quarter. The central bank will release its quarterly Tankan survey of business sentiment early next month. If the report shows signs of a recession, in contradiction to the BOJ's official line, it may spark speculation of additional easing.

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