Japan weighing downgrade of economic view, raises doubts on sales tax hike

[TOKYO] Japan's government is considering downgrading its assessment of the economy next week as the intensifying Sino-US trade war takes a toll on exports and factory output, a government source with direct knowledge of the matter told Reuters on Thursday.

A downgrade in the crucial monthly report could fuel speculation that Prime Minister Shinzo Abe may delay once again a planned sales tax increase set for October.

Speculation is swirling that Mr Abe may delay the planned tax hike to 10 per cent and call a snap election for parliament's lower house to coincide with an upper house poll this summer, at a time when "Abenomics" reflationary policy is sputtering.

Mr Abe has delayed the planned hike twice as he prioritised economic growth over fiscal reforms.

A previous tax increase to 8 per cent from 5 per cent in April 2014 hit consumers hard and triggered a sharp slump in the world's third-largest economy.

In its report in April, the government said Japan's economy was recovering gradually, despite signs of weakness in exports and output. It cut its economic assessment for the first time in three years in March.

Investors are closely watching whether the government will cut its economic outlook and if the word "recovery" remains in the report for May, especially after a fresh escalation in the US-China trade war last week which saw both sides hike tariffs on each others' goods.

Japan is expected to report a mild economic contraction in the first quarter in data due on Monday, according to analysts polled by Reuters.

The economy may already be in recession, a government assessment of its own economic indicators showed on Monday.

The trade war is prompting the government to review its earlier view that exports and factory output would bottom out later this year, the source told Reuters on condition of anonymity because he is not authorised to speak to media.

The government is considering cutting its assessment of capital expenditure and factory output in the May report.

"Capital expenditure is likely to have deteriorated, and net exports may have improved as imports probably fell faster than shipments, which were not necessarily a good thing. As such, Q1 GDP (gross domestic product) will likely turn out poorly," the source added.

REUTERS