TOKYO • Japanese braced themselves yesterday for the biggest economic contraction since 2014 at the end of last year, even as policymakers warned of the hit to come from the coronavirus outbreak, signalling alarm over a darkening outlook for the world's third-largest economy.
Bank of Japan (BOJ) executive director Eiji Maeda said gross domestic product (GDP) may have suffered a "big contraction" in the final quarter of last year due to sluggish overseas demand and damage to consumption from last year's sales tax hike.
"Japan's economy is expected to continue expanding moderately as a trend", thanks to robust capital expenditure and government spending, Mr Maeda told Parliament.
"But we need to be vigilant against various risks, such as the impact the coronavirus outbreak could have on output and spending by inbound tourists," he said.
Economy Minister Yasutoshi Nishimura also told reporters that the virus outbreak, as well as unusually warm weather that hurts sales of winter clothing, were "fresh factors weighing on the economy".
Analysts polled by Reuters expect Japan's economy to have shrunk an annualised 3.7 per cent in the October-December quarter, which would be the fastest pace of decline since 2014. The GDP data is due next Monday morning.
Japan is among countries worst affected by the epidemic outside China, with more than 250 confirmed cases, including those on a cruise ship.
Some analysts expect Japan's economy to suffer another contraction in the current quarter as the virus outbreak hurts exports, output and consumption through a sharp drop in overseas tourists.
The government decided yesterday to spend 10.3 billion yen (S$130 million) from budget reserves to respond to the coronavirus.
Finance Minister Taro Aso said the government was ready to take additional steps, depending on how big the impact from the outbreak could be.
Mr Maeda said the central bank will support the economy by maintaining its massive stimulus programme but stopped short of signalling additional monetary support.
His remarks suggest the BOJ does not see the virus impact as big enough yet to alter its economic projections.
But some in the BOJ worry that supply chain disruptions could hurt Japanese firms if Chinese factory shutdowns continue for weeks, sources familiar with their thinking say.
The BOJ next meets for a rate review on March 18 and 19.