Business / Economy

Japan downgrades prospects for economy due to China-U.S. trade war

Kyodo

The government on Friday downgraded its assessment of the economy, adding to signs that China’s economic slowdown amid its trade conflict with the United States has been weighing on production and exports.

“The Japanese economy is recovering at a moderate pace while weakness in exports and industrial production continues,” the Cabinet Office said in a monthly report.

It maintained its view that the economy is seeing a moderate recovery on improving employment conditions and robust corporate earnings, but slightly changed its wording on exports and production from the previous report. It had said last month that “weakness is seen recently in exports and industrial production in some sectors.”

The downgrading followed a lowered assessment in March, when the Cabinet Office cut the headline assessment for the first time in three years.

Looking ahead, the latest report warned that “further attention should be given” to the fallout for the world economy from the U.S.-China trade war.

Earlier this month, the Cabinet Office said in a different assessment that the world’s third-largest economy has been “worsening.” The expression was employed for the first time in more than six years.

The wording, used in assessing the coincident index of business conditions for March, could be seen as signaling that the economy is heading into recession.

The coincident index of business conditions for March fell 0.9 point from the previous month to 99.6 against the 2015 base of 100.

The Cabinet Office had cut its economic assessment of the index in January from “weakening” to “signaling a possible turning point” in the economy. That move raised doubts about the government’s assertion that growth from December 2012 had likely surpassed the “Izanami Boom,” a 73-month streak from 2002 to 2008.

A government panel will formally decide the length of the economic cycle after analyzing more data — a process that can take more than a year.

The developments leading up to Friday had raised expectations that the government would stop describing the economy as recovering in the latest report.

An official who briefed reporters on Friday’s report said the word “recovering” was maintained because overseas risks including China’s slowdown are unlikely to hit domestic demand hard anytime soon.

“The economic fundamentals that support domestic demand, including improving employment and salary conditions as well as high levels of corporate earnings, have remained steady,” the official said.

On the two differing assessments of the economy, the official said it is difficult to make a simple comparison between them.

While the coincident index is made up of nine indicators, the monthly report covers a wider range of data and other factors.

Among key components of the report for May, the assessment of business investment was also downgraded, with the Cabinet Office saying that “weakness is seen recently in machinery investment.”

It also cut the view for industrial production, warning it showed “weakness recently.”

It continued to say private consumption is “picking up” and that exports are showing “weakness.” It lifted its evaluation of public investment, citing steady government spending on public works projects.

Friday’s report is likely to further complicate debate on whether Prime Minister Shinzo Abe can raise the consumption tax in October as scheduled, despite fears the move could dampen consumer spending and bring the economic recovery to an end.

Speculation has already been rife over whether Abe will go ahead with the tax hike. Some believe Abe may dissolve the Lower House for a general election to determine based on voters’ sentiment whether the tax hike should be carried out as planned.