Japan keeps view economy recovering, flags virus as big risk

TOKYO (Reuters) - Japan's government kept its view that the economy is recovering moderately in a monthly report in February as the labour market remained solid, but it warned about risks to the outlook from the coronavirus epidemic.

The new assessment came even after Japan's economy shrank at the fastest pace in almost six years in October-December last year as a sales tax hike hit consumer and business spending.

While the government maintained its view, it slightly changed the wording to say the economy was "recovering at a moderate pace, while an increased weakness centered on manufacturers remains intact amid continued softness in exports."

A Cabinet Office official said: "The virus outbreak is the biggest risk to the economy. We need to pay a close attention to its adverse impacts to the economy."

The government also kept its view that factory output remained weak and said it was expected to stay sluggish for a while as the virus drags on China's economy and disrupts

global supply chains.

Among other key elements, the report said consumer spending was "picking up" and capital spending was "increasing moderately but showed some weakness". Both assessments were unchanged from last month.

And the government said exports were weakening.

Data this week showed Japan's machinery orders tumbled at their fastest pace since 2018 while exports fell for the 14th straight month.

The number of foreign visitors to Japan fell for the fourth straight month in January as the impact of a South Korean boycott continued to weigh. Sharper falls are expected ahead as the virus keeps away Chinese tourists and dampens global air travel.

Japan's financial watchdog has begun conducting an emergency survey on domestic financial institutions with business operations in China to gauge how the coronavirus outbreak could affect credit costs.

With growing global fallout from the epidemic, many private analysts believe that Japan's economy is on brink of recession.

(Reporting by Kaori Kaneko; Editing by Kim Coghill)