TOKYO (REUTERS, BLOOMBERG) – Japan’s economy likely suffered its biggest contraction since 2014 at the end of last year leaving it in a vulnerable state, as fallout from a coronavirus outbreak (Covid-19) threatens to turn a one-quarter-slump into a recession.

Japanese policymakers on Friday (Feb 14) braced for a sharp contraction in October-December growth and warned of the hit to output and consumption from the virus 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, 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 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 shrank 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 at 8:50am on Monday.

Japan is among countries worst affected by the epidemic outside China, with 251 confirmed cases including those on a cruise ship.

Some analysts expect Japan’s economy to suffer another contraction in the current quarter as China’s virus outbreak hurts exports, output and consumption through a sharp drop in overseas tourists.

The government decided on Friday 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.

BOJ’s Maeda said the central bank will support the economy by maintaining its massive stimulus programme but stopped short of signalling additional monetary support.

Maeda’s 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 18-19.