TOKYO (Reuters) – Japan’s exports rose in August and its central bank kept its view the economy was expanding modestly, but policy makers and analysts warned of risks to the outlook from a U.S.-led trade war that some fear could chill global investment and growth.
The Bank of Japan and many of its overseas counterparts have been put in a tricky position as a deepening tariff row between the United States and China threatens to unsettle asset markets, disrupt supply chains and undermine their economies and policies.
As widely expected, the BOJ on Wednesday maintained its short-term interest rate target at minus 0.1 percent and that for long-term rates around zero percent by a 7-2 vote.
Investors are focusing on BOJ Governor Haruhiko Kuroda’s post-meeting briefing for any warnings he may issue on the damage the intensifying trade war could inflict on growth.
“The Board’s concerns about the impact of prolonged easing haven’t disappeared. But worries about the economic outlook are more urgent,” said Marcel Thieliant, senior Japan economist at Capital Economics.
“With inflation set to remain well below the Bank’s 2 percent target, policy tightening therefore looks like a remote prospect.”
Beijing on Tuesday added $60 billion of U.S. products to its import tariff list in swift retaliation against U.S. President Donald Trump’s planned levies on $200 billion of Chinese goods.
In Japan, however, trade data released on Wednesday showed few signs of material damage so far. The BOJ statement, accompanying the policy decision, also said “Japan’s economy is expanding moderately” and that solid global demand was underpinning exports.
Japanese exports rose 6.6 percent in August from a year earlier, handily beating a median market forecast for a 5.6 percent increase and exceeding a 3.9 percent gain in July.
Exports to the United States were up 5.3 percent in the year to August, the first gain in three months, on brisk demand for medicines, construction and mining machinery.
Shipments to China, Japan’s biggest trading partner, rose 12.1 percent, while those to Asia were up 6.8 percent in a sign that most Japanese firms have so far been unscathed by the trade woes.
Still, analysts cautioned about the risks to the outlook.
“Overall, the U.S.-China trade war would have a negative impact on Japan’s exports and the economy,” said Koya Miyamae, an economist at SMBC Nikko Securities. “But the impact isn’t apparent in the August trade data… Any effect could come out from September onwards.”
Other analysts also pointed to signs of weakness in U.S. demand, with U.S.-bound car exports down for a third straight month, pulling back from last year’s brisk shipments.
The biggest concern among Japanese policymakers is that Trump could proceed with a threat to impose steep tariffs on imports of auto and auto parts. Exports of auto and auto parts make up roughly 33 percent of Japan’s shipments to the United States.
“The U.S.-Chinese trade dispute is escalating and the risk of an adverse impact has increased,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
“If the United States hikes auto import tariffs, the impact on Japan would be significant.”
A slowdown in external demand would add to headaches for the BOJ, which has failed to hit its 2 percent target despite years of heavy asset purchases.
Years of ultra-low rates have dried up bond market liquidity and strained bank profits, inflaming concerns even within the BOJ over the rising cost of its stimulus program.
The BOJ meeting came ahead of a ruling party leadership race on Thursday, which Prime Minister Shinzo Abe looks set to win and put him on track to become Japan’s longest-serving premier.
While few analysts expect the BOJ to immediately dial back stimulus, politicians have sent signals that they are becoming more amenable to the idea of a future exit from easy policy.
Abe said last week the BOJ’s ultra-easy policy should not last forever, signaling his hope of laying the path toward an exit from a radical stimulus program.
Markets are focusing on how Kuroda could respond to Abe’s remarks, as well as clues on whether the BOJ may act again to boost trading activity.
Despite the BOJ’s steps in July to make its policy framework more flexible and sustainable, long-term yields have been caught in a narrow band around 0.1 percent, underscoring the difficulty of chasing two goals – sticking to a policy that aims to cap bond yields while attempting to boost trading activity.
Additional reporting by Stanley White and Kaori Kaneko; Editing by Shri Navaratnam
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