MNI INSIGHT: Weaker Spending BOJ Worry; Domestic Risks Growing

By Hiroshi Inoue

     TOKYO (MNI) - A sharp slowdown in consumer spending as the coronavirus

impact spreads across Asia is a growing concern for the Bank of Japan, fearing

it, along with slowing capex spending, will reverse the virtuous cycle it sees

underpinning Japan's recovery, MNI understands.

     Until now, the BOJ has seen the main downside risks to Japan's economy

coming from slowing overseas economies. But now it sees domestic demand,

particularly private consumption, emerging as a potential risk.

     A further risk to sentiment could come from increased financial market

volatility and the BOJ could consider measures such as increased long-term

liquidity injections to help stabilize sentiment when in meets in mid-March,

although a liquidity shortage is not the real concern for a market currently

rattle by the spreading virus.

     A downturn in both corporate and consumer sentiment, leading to a dip in

corporate profits and a further decline in spending, will weigh heavily on an

economy already under pressure following a sharp decline in Q4 growth.

     --RECOVERY

     Although downside risks are growing, the BOJ still sees a recovery sometime

after mid-2020, underpinned by the International Monetary Fund's view that

China's economy will likely return to normality in Q2.

     There have been some bright spots, with BOJ officials noting the

better-than-expected industrial production data in January. However, the data

covers a period that precedes the worst impact from the coronavirus output and

the central bank expect a decline in February putting further pressure on

corporate profits.

     Industrial production rose 0.8% m/m in January for the second straight rise

following +1.2% in December.

     --OUTPUT GAP

     The output gap remains a key driver for the BOJ in achieving momentum

towards higher prices and if slowing domestic demand triggered an easing of

tight labour markets across the service sector, that gap would likely narrow.

     The BOJ expect a further narrowing of the current positive output gap

following the March Tankan survey as the virus-driven drop in Chinese tourist

numbers will affect hiring at non-manufacturers.

     A hotel in Aichi Prefecture is already set to file for bankruptcy as

visitor numbers fall sharply, Tokyo Shoko Research said this week, marking the

first business failure in Japan directly linked to the coronavirus.

     Japan's Prime Minister Shinzo Abe on Wednesday requested the cancellation,

postponement or downsizing of planned nationwide sports and cultural events for

the next two weeks and there is a growing fear that an extended virus

interruption to the economy could threaten this summer's Tokyo Olympics.

     Tokyo CPI prices also slowed in February, up just 0.5% on a year ago, with

falling prices for overseas holidays a major downward driver. The BOJ expects

further downward pressure in February, with slowing tourism across Asia a

weight.

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

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

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