Japan retains cautious economic view, flags risks from US trade policies

TOKYO, Jan 22 (Reuters) – The Japanese government largely retained its cautiously optimistic view of the economy in its economic report published on Thursday, while warning of downside risks ‍from U.S. trade policies.

In its monthly economic assessment for January, the Cabinet Office reiterated that the world’s fourth-largest economy was recovering moderately, but highlighted the possible impact from U.S. policies on especially its auto industry.

It also underlined the need to remain vigilant over market movements.

Its ‌outlook on private consumption, which accounts for more ‌than half of the economy, was maintained and described as “picking up” for a fifth consecutive month.

The only major change in the economic assessment was in the trade and services balance, revised to “roughly balanced” from “in ​deficit.”

On prices, it said the rise in food costs – the main driver of inflation – slowed, and the government will watch ‍closely to see whether signs of ​a slowdown in price increases take hold.

The yen’s ​sharp declines since October, however, have heightened uncertainty on whether cost-push ‍price pressures will moderate as smoothly as the central bank projects.

Japan’s economy contracted an annualised 2.3% in the third quarter as a drop in exports from the impact of higher tariffs resulted in the first contraction in six quarters.

Meanwhile, the Bank ‍of Japan (BOJ) is expected to keep its interest rates steady at its two-day policy meeting ending on Friday, after raising its benchmark rate ‍to a 30-year-high ‍of 0.75% just last month.

Political developments have also ​added to economic uncertainty. On Monday, Prime ​Minister Sanae ⁠Takaichi called a snap parliamentary election for ‌February 8 to seek voters’ backing for policies, including increased government spending and a two-year suspension of a consumption tax on food.

Her proposals sparked a broad selloff in bonds, currencies and stocks on concerns that Japan’s already strained public finances could worsen.

(Reporting by Satoshi Sugiyama; Editing ⁠by Jacqueline Wong)