BOJ warns of trade war impact on regional Japan, keeps assessment intact

TOKYO (Reuters) - The Bank of Japan on Monday cut its assessment on factory output for two of the country’s nine regions and warned that more companies were feeling pinched by the U.S.-China trade war than three months ago.

FILE PHOTO: A Japanese flag flutters atop the Bank of Japan building under construction in Tokyo, Japan, September 21, 2017. REUTERS/Toru Hanai

But the central bank maintained its view that regional economies were expanding or recovering, suggesting it is in no rush to ramp up stimulus unless conditions sour dramatically.

“While Japan’s economy may be affected by slowing overseas growth for the time being, it is likely to continue expanding moderately as a trend,” BOJ Governor Haruhiko Kuroda told a meeting of the bank’s regional branch managers.

In a quarterly report issued by the branch managers, the BOJ kept intact its economic assessment of all nine areas, as solid domestic demand offset some weak signs in exports and output.

But it cut its assessment on output for two regions including the Kinki western Japan area - home to electronic giants such as Panasonic Corp 6752.T - reflecting slowing global demand for capital goods and electronic parts.

The report also said an increasing number of firms cited heightening uncertainties over the overseas economic outlook and the impact on Japan, given the U.S.-China trade friction.

“Semiconductor-related orders were falling since last summer but orders slid further from around May, as it became clear the U.S.-China trade friction will be prolonged,” the BOJ report quoted a machinery maker in western Japan as saying.

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The report said most regions still saw capital expenditure increasing, suggesting trade tensions have yet to make companies put off investment plans.

Yasuhiro Yamada, head of the BOJ’s Osaka branch overseeing the Kinki region, said the weakness in external demand was likely temporary as solid U.S. and European demand made up for sluggish shipments to Asia.

“Many companies are keen to invest and there’s no change to this stance,” Yamada told reporters. “Domestic demand, including consumption and capital expenditure, remains robust.”


Japan’s economy expanded an annualized 2.1% in the first quarter but many analysts predict growth will slow in the coming months as the U.S.-China row hurts exports. October’s scheduled sales tax hike may also curb consumption, they warn.

Data earlier on Monday showed core machinery orders, a leading indicator of corporate investment, fell by the most in eight months, casting doubt on the BOJ’s view that solid domestic demand will keep the recovery intact.

BOJ executives have said they are ready to ramp up stimulus if the economy loses momentum for achieving the central bank’s 2% inflation target.

Some analysts say the BOJ could ease as early as its July 29-30 rate review, if global uncertainties trigger a yen spike big enough to derail Japan’s export-reliant recovery.

But the BOJ likely won’t top up stimulus easily as years of aggressive easing have pushed borrowing costs to or below zero, straining commercial banks’ margins and leaving the central bank with little ammunition to fight the next recession.

The regional economic report will be among factors the BOJ’s nine-member board will scrutinize at this month’s rate review, when it will also issue fresh quarterly growth and inflation projections.

Editing by Jacqueline Wong and Richard Borsuk