BoJ slowdown warning and weak US manufacturing add to economic worries - as it happened

UK outsourcer Interserve, which handles thousands of government contracts including cleaning hospitals and prisons and providing school meals, may be about to fall into administration.

A pre-pack administration would allow the firm to keep operating:

Here’s the background to this morning’s shareholder meeting, on whether to approve a restructuring plan that would almost wipe out existing investors.

Overnight, German carmaker Volkswagen and its former chief executive Martin Winterkorn have been accused of defrauding US investors.

My colleague Jasper Jolly explains:

The US Securities and Exchange Commission is suing Volkswagen and its former chief executive, accusing them of defrauding investors by making “deceptive” claims about the environmental impact of its cars.

The regulator said that from 2007 until 2015, VW carried out a “massive fraud” when selling securities and half a million cars it described as clean diesel, when executives knew about the extent of the cheating, the SEC alleged. The cars emitted 40 times more harmful nitrogen oxides than allowed under US rules.

Vincent-Frěděric Mivelaz of Swissquote Bank says the Japanese economic outlook has deteriorated.

Economic headwinds forced the BoJ to revise exports and production downward. January exports dropped -9% (prior: -5.80%), their lowest in three years and the third consecutive drop while imports have rebounded 0.50% (prior: -2.20%) in the same period.

There was an unexpected pick up in the January current account balance of JPY 600.4 billion (prior: JPY 452.8 billion) amid a sharp rise in investment income due to an expansion phase in financial markets, yet the drop in January machine orders by 5.40% suggests further slowdown in Q1.

BoJ’s change of language from “increasing as a trend” to “recently showed some weakness” shows the situation is not expected to improve until Q3. Assumptions of 2% inflation have now become wishful thinking.

As I was saying....

Japan’s stock market rallied today, as investors calculated that the BoJ won’t tighten monetary policy soon given the weak global outlook.

European stock markets have also picked up pace, hitting their highest level in five months this morning.

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Jasper Lawler of London Capital Group says:

A report that more progress had been made in trade talks between US and China calmed market jitters and lifted Asian markets overnight. Sentiment was also supported by news that the UK Parliament voted to postpone Brexit.

In an ironic twist, the Bank of Japan governor also criticise Modern Monetary Theory, claiming the idea is extreme.

Asked about MMT (very broadly speaking, the idea that government deficits aren’t intrinsically bad, unless they fuel inflation), Kuroda told reporters:

I think it is an extreme argument that won’t be accepted widely.

The government holds responsibility over fiscal policy and Japan’s public debt is very high. It’s important to improve Japan’s fiscal health in the long term.”

MMT advocates might be rolling their eyes, given Japan’s recent economic history. It’s managed to swell its national debt to twice its national income without struggling to finance its deficit. Plus, the BoJ’s money-printing scheme has been notably ineffective in fuelling inflation.

Bloomberg’s Gearoid Reidy tweets:

Bjørn T Sillemann, analyst at Danske Bank, points out that Japan’s manufacturing has weakened recently (activity shrank last month for the first time since 2016).

BoJ governor Kuroda insisted that he’s not giving up on getting Japan’s inflation rate up to 2%.

He told reporters:

“I don’t think there is a need to make any changes to our price target.”

But.... despite years of record low interest rates, and a massive QE programme, Japanese inflation only rose by 0.4% last month.

Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities, suspects the Bank may have to rethink its plans.

“Over the longer term, the BOJ will probably have to reconsider again what the best policy framework is, given that it will take a very long time to hit the price target.”

There’s a danger that economic weakness could drag Japan close to recession again (it shrank in the third quarter of 2018, before expanding in Q4).

Darren Aw, Asia economist with Capital Economics, reckons the BoJ may be forced to boost its stimulus programme later this year.

Aw says (via the FT)

There is a good chance that Japan’s economy will contract again in Q1, for a third time in five quarters.

Given this, the key question for the Bank of Japan is no longer when it might retreat from its ultra-loose policy stance but whether it can do any more to support the economy.”

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Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The Bank of Japan has become the latest top central bank to warn that the global economy is slowing.

At its latest policy meeting today, the BoJ downgraded its view of Japan’s economy - cautioning that exports and industrial output have been “affected by the slowdown in overseas economies.”

BoJ governor Haruhiko Kuroda warned that problems overseas are making it harder for Japan:

“It is true Japan’s exports and output are being affected by lean overseas growth. On the other hand, domestic demand continues to grow. We maintain our baseline view that the economy is expanding moderately.

“It is likely to take longer to achieve our price target.However, the output gap is improving ... Most board members think it’s more appropriate to patiently maintain our current stimulus programme.”

So, although Japan’s domestic economy is growing, policymakers left its short-term interest rate target at minus 0.1 per cent.

The BoJ will also continue its policy of buying 10-year Japanese government bonds so that yields remain at around 0 per cent -- to drive money into riskier assets and spur growth.

Bloomberg says Kuroda and colleagues are taking a more pessimistic view, given recent weak data.

The BOJ also downgraded its assessment of exports, factory output and overseas economies. The gloomier take on the economy was also largely expected after a raft of weak data over the past month.

The slowdown is making it even harder for the BoJ to achieve its target of raising inflation to 2% through its huge stimulus programme.

Kurora also warned there was a chance that the global economy deteriorate further -- although he’s hoping for a pick-up soon.

He told reporters:

The chance of overseas economies worsening further is low. It’s a risk. However, the baseline scenario is for overseas economies to pick up in the latter half of this year,particularly areas that are currently witnessing signs of weakness such as China and Europe.”

Also coming up today

UK government contractor Interserve is facing a crunch vote on Friday which could push it into administration. It hopes to persuade shareholders to back a rescue deal in which lenders would own 95% of the firm.

But if shareholders reject its debt-for-equity-swap plan in the vote, lenders could push it into administration.

In the City, UK pub chain JD Wetherspoon and eateries chain the Restaurant Group are reporting results.

The agenda

• 10am GMT: Eurozone inflation for February
• 2pm GMT: University of Michigan survey of US consumer confidence