TOKYO (Reuters) - Even as Japan has stressed that the Olympics will proceed as planned, government and central bank officials are more seriously weighing the risk of cancelation when making projections for this year’s economic outlook, sources said.

A man wearing a protective face mask, following an outbreak of the coronavirus disease (COVID-19), walks past walk past the Olympic rings in front of the Japan Olympics Museum in Tokyo, Japan March 13, 2020. REUTERS/Athit Perawongmetha

The Bank of Japan is expected to loosen monetary policy next week to ease the hit to business sentiment from the coronavirus outbreak and the subsequent market volatility.

Such a move would still be based on an assumption that the economy will make a quick V-shaped recovery, fueled in part by a boost in demand from the Olympics in July.

However, policymakers assessing the scale of the damage fear an Olympic cancelation will upend even their most pessimistic scenario on the prospects of such a recovery, according to multiple sources.

“You need to be prepared for the chance of a cancelation and the loss that could cause,” said an official with direct knowledge of the government’s deliberation on the matter.

“The government’s economic package, to be compiled in April, will probably take into account this risk,” the official said.

Prime Minister Shinzo Abe’s government has repeatedly stressed that the Tokyo Olympic Games will go ahead as planned. However, there are growing doubts as the coronavirus outbreak worsens around the globe, prompting quarantines, travel restrictions and cancelations of sporting events.

On Thursday U.S. President Donald Trump floated the possibility of a one-year postponement for the Games, although he later praised Japan’s “magnificent” venue.

The damage to the economy from a cancelation would be huge, marking a severe blow to household and corporate sentiment, already souring from event cancelations, slumping tourism and travel curbs, the sources say.

“In times like now, keeping public sentiment from cooling too much is extremely important,” another official said on condition of anonymity as he was not authorized to speak publicly.

“If the Olympics is canceled, consumption could freeze.”

Some analysts had believed the world’s third-largest economy was already in danger of tipping into recession before the virus outbreak worsened.

CRUNCH TIME

Some ruling party lawmakers and government officials see the need to prepare for the risk of a cancelation.

The crunch time for policymakers is around end-April, when the BOJ meets for another rate review and issues fresh quarterly economic projections. Their hope is that by then, the epidemic will have subsided and Tokyo can host the Games as planned.

If not, the rosy projections of Japanese policymakers - that the economy will rebound in the latter half of this year and sustain a moderate recovery - could unravel, the officials say.

“It will be a huge problem if little progress is made in containing the virus by end of next month,” a third official said. “If the Olympics is canceled, the economy could crumble.”

With the market rout already denting morale, the BOJ is expected to downgrade its assessment of the economy next week from the current view that it is “expanding moderately as a trend,” sources familiar with its thinking say.

Government and BOJ economists have yet to firm up estimates on how much an Olympics cancelation could cost the economy. But some say private forecasts of around 7 trillion yen ($66 billion) - or 1.4% of gross domestic product - may be too optimistic.

Even a postponement of the Olympics would be damaging. The economy shrank in October-December due to the hit from last year’s sales tax hike, and it could contract again in the current quarter as the virus curbs global trade and tourism.

“If conditions (regarding the epidemic) are bad enough to cancel the Olympics, that in itself is a huge problem for the economy,” said a fourth official. “It will be a completely new shock to the economy.”