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Economy

Japan signals caution on economy over China uncertainty

Tokyo says recovery continues while flagging exports as a concern

The government maintained its assessment of a moderate economic recovery but warned that the struggling Chinese economy could be felt at home.   © Reuters

TOKYO -- Japan maintained its official view that its economy is in recovery on Wednesday but tweaked the language of its assessment for the first time in three years on worries that slowing economies overseas, especially in China, will eventually be felt at home.

Citing stable capital spending and consumption, the Cabinet Office diagnosed the economy as "recovering at a moderate pace" in the March edition of its monthly economic report but warned that "weakness is seen recently in exports and industrial production in some sectors."

The Chinese slump, which fed the decline in exports and production, could also shake core domestic factors like capital expenditures if it drags on, likely forcing Japan to sharply downgrade its assessment. With Beijing preparing a 2 trillion yuan ($299 billion) stimulus package, Tokyo appears to be pinning its hopes for a continued recovery on improving economies overseas.

Eyes had been on the government's official economic view after January readings of a coincident index of business conditions were deemed to be "signaling a possible turning point." The report batted away the view held by some economists that the Japanese economy is in fact already in retreat.

The biggest point of concern was whether the word "recovery" would be kept, as it has since July 2013. Deleting the term would have signaled a turnaround in the overall improvement that has persisted since December 2012, when Prime Minister Shinzo Abe launched his signature Abenomics policy package.

"There is no change to our view that January may have marked the longest recovery in postwar history," Economic and Fiscal Policy Minister Toshimitsu Motegi told reporters on Wednesday. Motegi doubles as the economic revitalization minister who delivers the monthly report at a cabinet meeting.

The report cited robust economic fundamentals at home, with improvements in employment and income, as well as strong corporate profits. It noted that private consumption and capital spending together equated to around 70% of gross domestic product, against just 18% for exports, and chalked up signs of weakness to temporary external factors, holding that the economy is "expected to continue recovering" in the short term.

But how temporary overseas slowdowns will prove remains to be seen. In China, concerns over the U.S. trade war and prospects for the domestic economy ate into investment, pushing down Japanese exports to China 17.4% in January. The tally recovered only gently to 5.5% growth the following month.

Fears remain that Beijing's trade frictions with Washington could dent the Chinese economy still further. If this happens, the domestic demand Japan depends on could take a hit, with the slump in exports impacting production and causing businesses to rethink capital spending plans.

"Private consumption isn't strong enough to cover for a drop in external demand," said Takeshi Minami of Japan's Norinchukin Research Institute.

Production is linked to four of the nine components of the index that the government bases its outlook for present conditions on. A drop in production could push it into deteriorating territory, leaving the government hard-pressed to classify the economy as still recovering. March's monthly report called industrial production "almost flat" with weakness "seen in some sectors" -- its second downgrade to the language in as many months.

Tokyo is likely wary of pouring cold water on an economy it said in January had likely notched its longest recovery in postwar history. Instilling too much worry could make consumers and businesses shy away from purchases and investments, creating downward pressure.

There are also concerns that a negative economic view could spur speculation that a twice-delayed consumption tax hike, now scheduled for October, will be postponed once more. Even some in the Bank of Japan have speculated that classifying the economy as in retreat could lead to a delay in the tax hike.

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