Japan government remains optimistic on economy but storm clouds gather

TOKYO (Reuters) – Japan’s government stuck with its optimistic assessment of the economy in December, but a sharp slowdown in exports shows the trade war between the United States and China poses serious risks to growth for the world’s third-largest economy.

Japan’s economy is in gradual recovery, the Cabinet Office said on Thursday in its monthly economic report, unchanged from its assessment last month.

The Cabinet Office also left unchanged its view that exports are broadly flat, but this did not take into account data published on Wednesday showing a faster-than-expected slowdown in exports in November.

Weakening economic data from China, declining trade flows, falling oil prices, and a global decline in bond yields all point to slower economic growth next year, which could hurt Japan because its fortunes are closely tied to external demand.

“The economy is expected to continue recovering,” the Cabinet Office said in the report.

“However, attention should be given to risks, including global trade, overseas economies and financial market moves.”

In December, the Cabinet Office left unchanged its assessment that capital expenditure is rising, but some economists are worried companies will curb investment due to uncertainty about overseas demand.

The United States and China have temporarily suspended imposing additional tariffs on each other, but there is a lot of uncertainty over whether the two countries can settle their differences and avoid further trade disruptions next year.

Japan is at risk because it exports manufacturing equipment and electronic parts to China, which are used to make finished goods for the United States and other markets.

The government left unchanged its assessment that consumer spending is recovering due to a recent increase in spending on new cars, travel and dining out.

However, the outlook is less certain next year because the government is scheduled to raise the nationwide sales tax to 10 percent from 8 percent in October.

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