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Tokyo downgrades view of economy as US-China trade war affects exports, output

Tokyo

JAPAN'S government downgraded its assessment of the economy in March for the first time in three years, blaming a bruising US-China trade war for slumping exports and industrial output.

The Cabinet Office, which helps coordinate government policy, said on Wednesday that the economy is in gradual recovery, but exports and output are showing signs of weakness.

The monthly economic report for March was a downgrade from February, when the Cabinet Office simply said that the economy was in gradual recovery.

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The March report gave a pessimistic outlook, saying that this bout of weakness could continue for some time in the future.

The downbeat assessment could fuel calls for the government to delay a nationwide sales tax hike scheduled for October, and increase speculation that the Bank of Japan (BOJ) will take some steps to bolster economic growth.

But BOJ policymakers disagreed on how quickly the central bank should ramp up monetary stimulus, minutes of their January rate review showed on Wednesday, as heightening overseas risks threatened to derail the country's fragile economic recovery.

While most members agreed that it was appropriate to maintain the BOJ's current stimulus programme, one of them said that the central bank must stress its readiness to take "quick, flexible and bold" action including additional easing, the minutes showed.

"Given the timing of achieving the price target had been delayed, it was undesirable to adopt a stance of not taking action until a serious crisis occurred," the member was quoted as saying in the minutes.

Another member, however, said that acting too hastily during times of uncertainty could lead to financial imbalances and unnecessary swings in the economy, the minutes showed.

Some in the nine-member board also warned that an increasing number of regional banks could be taking excessive risks to secure profits as years of ultra-low interest rates hurt their bottom line, the minutes showed.

"We need to look carefully at whether regional banks are lending in a way where they are earning returns that meet the risks," one of the members said.

Exports fell for a third straight month in February and industrial output in January saw its sharpest decline in a year as tit-for-tat tariffs between Washington and Beijing slowed China's economy and reduced demand for mobile phone parts and chip-making equipment from Japan.

The Cabinet Office downgraded its assessment of industrial production for the second consecutive month, saying that it has shown signs of weakness and flatlined.

Despite the damage from the trade war, Japan's economy should continue to grow moderately because consumer spending and capital expenditure are holding up, a Cabinet Office official told reporters at a briefing.

For March, the government left unchanged its assessment that consumer spending is recovering and capital expenditure is increasing.

However, there are concerns that companies will start cutting capital expenditure plans for fiscal 2019 in April due to uncertainty about global trade policy.

Japan's manufacturing sector is exposed to the trade war because it sends electronic parts and capital goods to China, where they are used to make finished products destined for the United States.

The government is scheduled to raise the nationwide sales tax to 10 per cent from 8 per cent in October, but there are concerns that this will weaken consumer spending and harm growth. REUTERS