MNI INSIGHT: Virus Impact on Q1 GDP To Decide BOJ's Next Move

By Hiroshi Inoue

     TOKYO (MNI) - The scale of the Japanese Q4 slowdown was even greater than

that expected by the Bank of Japan, but the central bank still expects a bounce

in the first three months of the year, although it acknowledges the coronavirus

risks derailing the recovery, MNI understands

     The BOJ will likely judge the extent of any recovery in Q1 before taking

any policy action, giving it the opportunity to see the results of the March

Tankan survey and the quarterly forecasts prepared for the April policy meeting.

     The slowdown in Q4 had been expected in the wake of the October sales tax

hike and the string of natural disasters in the autumn, although the size was

larger than expected and it is unlikely any rebound will come close to replacing

lost output.

     GDP fell 1.6% q/q in Q4, or an annualized -6.3%, preliminary data showed.

Private consumption, which accounts for about 60% of Japan's GDP, fell 2.9% q/q

in Q4, while business investment fell 3.7% q/q.

     The BOJ still sees growth recovering, with "effects of the tax hike and

natural disasters dissipating" although weak overseas economies could continue

to weigh.

     --CORONAVIRUS IMPACT WORRY

     However, coronavirus has increased uncertainty over the outlook and the

impact on manufacturers, supply-chains and sentiment, although it is unclear

whether or how the BOJ would react if it sees any increase in risk to its

recovery scenario.

     Some BOJ officials are now concerned that the outbreak could force a second

straight quarter of contraction, undermining the bank's outlook and putting a

dampener on its January growth forecasts.

     The BOJ next meets on March 18-19, but the late April meeting is seen as

key - after the results of the March Tankan survey have been seen, after the

quarterly branch managers meet and as the bank lays out the next round of

quarterly forecasts.

     The key focus will again be on whether capital investment plans are revised

lower in March and fall below historical averages, particularly whether or not

the virus impacts the corporate outlook, damaging the virtuous cycle between

profits and spending that the BOJ sees underpinning the recovery.

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

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