MNI INSIGHT: BOJ View May Be Impacted By Virus; Prices Threat

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan's outlook for the economy to pick up

modestly in Q1 could be jeopardized by the coronavirus outbreak, although it is

unclear whether or how the central bank would immediately react if it sees any

increase in risk to its recovery scenario, MNI understands.

     A weaker-than-seen recovery would undermine the baseline view "Japan's

economy is likely to maintain an expanding trend as domestic demand is expected

to follow an uptrend with a virtuous cycle from income to spending continuing to

operate", an expectation that underpinned the BOJ's upgraded GDP forecasts in

the January quarterly outlook.

     More importantly, any threat to the GDP forecasts would put fresh pressure

on prices, further lowering the median forecasts for the core inflation rate,

already revised lower in January, when the BOJ cuts its core forecast to 0.6%

from 0.7%, noting that risks "remain skewed to the downside."

     Governor Haruhiko Kuroda told lawmakers on Feb. 4 it was premature to say

the central bank would undertake additional easy policy or "what kind of

additional easing the BOJ would implement."

     Upbeat industrial production forecasts in January offered many economists,

including BOJ staff, cause for optimism. However, the report reflected data as

of Jan. 10, before the scale of possible impact of the virus outbreak was

identified.

     --SUPPLY CHAINS

     Already the coronavirus has restricted corporate activity in China and

severely disrupted supply-chains, making it difficult for Japanese

manufacturers, mainly in the auto sector, to ramp up production at home.

     A reflection on the potential impact from a breakdown in supply is that

Japan imported JPY328.5 billion of auto parts from China in 2019, up from just

shy of JPY100 billion in 2009.

     The Chinese economy accounts for about 18% of global economic growth, up

from about 4% in 2003 when the global economy was hit by the SARS outbreak.

     The BOJ is working hard to gather information on how companies have been

hit by coronavirus and how they are dealing with the situation, hoping they can

get a better read on how the economy is faring after the weakness seen in Q4.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

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