Japan PM says ready to protect economy from coronavirus woes

Japan is adopting preventive measures to save economy from the impact of coronavirus on its economy. Japanese Prime Minister Shinzo Abe pledged on Friday to take policy steps as needed to prevent the coronavirus outbreak from dealing a severe blow to the country’s fragile economic recovery.

The government still had sufficient reserves to tap for emergency spending related to the coronavirus epidemic, signalling that the prime minister saw no immediate need to compile a fresh spending package.

“But I’m aware of views that if the virus spreads, it could have a huge impact on the economy,” Abe told parliament. “We’re therefore watching developments carefully.”

“If developments change, we’ll ensure to take steps as needed to prevent the virus from becoming a huge downside risk to Japan’s economy,” he said.

Japan’s economy shrank at its fastest pace in nearly six years in the December quarter, as soft global demand and last year’s sales tax hike hurt consumption and business spending.

Some analysts expect the economy to shrink again in the current quarter and slip into recession - defined as two straight quarters of contraction - as the virus disrupts supply chains, triggers cancellation of events and keep shoppers home.

“It’s true Japan’s economy is in a pretty tough condition,” due to cancellations of various events,” economy minister Yasutoshi Nishimura told parliament on Friday.

“But the priority now is to prevent the virus from spreading.”

Asian stocks tracked another overnight plunge in Wall Street’s benchmarks on Friday with markets in China, Japan and South Korea all posting heavy losses on fears the coronavirus would become a pandemic and derail economic growth.

A senior Japanese finance official said on Friday that market movements were reflecting the “shock” of the new coronavirus spreading, but refrained from commenting on specific market moves.

Abe’s administration has focused on stock price moves as a barometer of success of its “Abenomics” stimulus policies aimed at reflating the economy.

Market moves are also seen by investors as a key trigger for additional monetary easing by the Bank of Japan.

Japan’s government compiled a fiscal spending package late last year to counter the hit to exports from soft global demand. But some ruling party lawmakers are beginning to call for fresh spending given the damage from the epidemic.

Having used up most of its ammunition, however, the central bank appears reluctant to deploy additional stimulus - at least for now.

“I don’t think the BOJ needs to take additional monetary easing steps now in response to the coronavirus outbreak,” said Goushi Kataoka, one of the most dovish members of the central bank’s board.

“We need to first look at how serious the impact from the outbreak would be,” he told reporters on Thursday.

Meanwhile, Japanese shares plummeted in heavy volume on Friday to their lowest in nearly six months as global markets sold off on the rising possibility the coronavirus outbreak would become a pandemic.

The benchmark Nikkei average tumbled 3.7% to 21,142.96, its lowest closing level since Sept. 5.

The index was down 9.6% for the week, the biggest in four years. For the month, it was down 8.9% - the worst in 14 months.

Looking ahead, analysts say the Nikkei could be supported around 20,700, where it will be traded on par with its book value.

The Nikkei’s volatility index, a measure of investors’ volatility expectations based on option pricing, spiked to as high as 42.85, its highest level since June 2016.

An increase in volatility prompts automatic selling by “risk-parity” funds, which target a constant level of volatility, as well as trend-chasing commodity trading advisers (CTA), and often exacerbates turbulence in prices.

Analysts said such selling should already be happening, since market saw volatility spikes over the past four trading days.

The broader Topix shed 3.7% to 1,510.87, its lowest since early September, in very active trade, with the volume hitting the heaviest since May 2018 at 4.13 billion shares, partly due to MSCI’s quarterly index rebalance.

In a sign of broad-based selling, all of the 33 sector sub-indexes on the Tokyo Stock Exchange were trading lower, with real estate, information and communication and fish and forestry being the worst three performers.

Reuters