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Trade tensions hang over upcoming Bank of Japan meeting

Policy board likely to stand by July's assessment of economy 'expanding moderately'

The Bank of Japan is trying to gauge the fallout of the trade war on Japanese businesses. (Photo by Toshiki Sasazu)

TOKYO -- The impact of global trade frictions on the domestic economy will be a focal point of discussion when the Bank of Japan's policy board meets next week.

The two-day session will likely end Wednesday with the central bank maintaining its assessment that the Japanese economy is "expanding moderately," as it stated after late July's meeting. Board members are expected to discuss such risks as the ongoing Sino-American tariff war.

The U.S. and China have been slapping tariffs on each other's goods since July. The BOJ has been surveying businesses across Japan to gauge the effect on their operations. "The real fallout from the trade war has manifested, though it is still minuscule," a BOJ official said. Certain Japanese companies that had shipped items made in China to the U.S. have shifted production to Japan.

Japanese corporate earnings and capital investment have been robust. But the bank worries about a sudden slowdown in production, exports and capital spending by companies. Many businesses "do not have a good grasp of where their products end up being used," a BOJ official said.

The central bank anticipates a change in behavior first among small and midsize companies, since they tend to be quicker to scale back capital investment plans if they expect orders to drop, for example.

The board will evaluate the business survey results and other indicators to feel out the potential effect on the economy.

There is also concern that inbound tourism could take a hit from recent natural disasters, including the earthquake that shook the northern Japanese island of Hokkaido and the typhoon that flooded the greater Osaka area. But many at the BOJ expect only a minimal impact, at least for now.

July's policy board meeting saw the bank lower its price outlook and tweak monetary policy. The BOJ doubled the allowable range for yields on 10-year Japanese government bonds, responding to concerns that its efforts to keep them near zero are contributing to stagnation in the JGB market. Yields could thus rise to up to 0.2% or so, the market expects.

Yields have hovered around 0.11% of late, but trading has not gained momentum. Many policy board members say it will take some time to gauge the effect of the policy change.

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