Japan cautious on economy as Trump's policies take centre stage

TOKYO (Reuters) - Japan's government on Thursday maintained a cautious outlook for the economy in part as policymakers kept a wary eye on U.S. President Donald Trump's policies and their potential impact on global growth.

The government also said fluctuations in financial markets are among other factors to watch, and retained its view on the economy recovering moderately in January underpinned by steady wage gains and a solid corporate sector.

"Executive orders of various policies such as an immigration policy and energy policy, which would have an impact on the economies of both within and outside of the U.S., are being made in the U.S.," said an official at the Cabinet Office.

Trump's threats of tariffs against key trading partners have stoked uncertainty for investors and policymakers, and have buffeted global markets since before and after his sweeping Nov. 5 U.S. election.

Most Japanese firms operating in the United States are bracing for the fallout of Trump's polices, a survey released last week showed.

The Cabinet Office report said Japan's investment in the U.S. has been increasing, ranking as the top for five straight years since 2019. Japanese companies are also contributing to job creation in the U.S., taking the top spot in the manufacturing sector, it added.

In the January report, the government maintained its view on most of the key economic areas. Private consumption, which accounts for more than half of the Japanese economy, was "picking up" and corporate profits were "recovering overall."

The government expects the economy will continue to recover gradually helped by an improvement in the employment and wage environment, the report said.

Japan's November base salary, or regular pay, rose at the fastest pace since 1992, after major companies agreed to higher pay at the spring wage negotiations.

The nation's biggest business lobby Keidanren and trade unions kicked off this year's wage talks on Wednesday and policymakers will be focused on how far the momentum spreads to smaller firms.

The monthly report comes ahead of the Bank of Japan's monetary decision at the end of its Jan. 23-24 meeting. The central bank is likely to raise interest rates barring any Trump-induced market shocks and maintain a pledge to keep pushing up borrowing costs if the economy continues to recover.

(Reporting by Kaori Kaneko; Editing by Shri Navaratnam)