Japan economy remains stalled
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The Bank of Japan downgraded its assessment of the economy for a second month yesterday, saying the slowdown in industrial production has become more pronounced as exports decline.
The slowdown is causing manufacturers to lose confidence, as inventories rise, the BOJ said in its monthly economic report.
"Adjustments in activity have been under way as production is declining, reflecting a fall in exports," the BOJ said in its April report. A senior BOJ official said that reflects a downgrade in the assessment of the economy.
Last month, the bank said the recovery had stalled.
The adjustment "will continue for some time," the bank said.
The BOJ had been expected to downgrade its assessment of the economy after its quarterly Tankan survey showed business confidence fell in the first quarter for the first time in more than two years.
"The central bank's downgrade of the economy is within expectations," said Takehiro Sato, an economist at Morgan Stanley Dean Witter Japan Ltd., before the report was released.
The central bank's decision to downgrade its assessment of the economy mirrors the government, which on Friday, for the first time since September 1995, used the word "weakening" to describe the economy.
The central bank last month decided to inject more money into the banking system by raising its target for bank's current account deposits it holds to 5 trillion yen ($40 billion) from 4 trillion yen, and guide its key lending rate to zero.
The policy, which is intended to increase the supply of money to the economy, will stay in place until consumer prices, excluding fresh food, stop falling from year-ago levels. That could be at least two to three years away, analysts say. Prices fell 0.6 percent in February.
Policy changes
At its two-day policy meeting, which ended Friday, the bank's board decided to leave policy unchanged, in its first unanimous vote in almost three years.
The central bank has left open the possibility of pumping more money into the economy by increasing the amount of bonds it buys each month from investors, or raising the target for the reserves it holds.
The bank highlighted its concern of the threat falling prices pose to the economy, saying weak demand may intensify the downward pressure on prices. "Prices will be weak for the time being," the BOJ said.
The BOJ reiterated last month's view that exports are falling rapidly and the pace of profit growth is slowing significantly. Exports will continue to drop and business investment will probably gradually reach a peak, the report said.
The BOJ forecast the main measure of money supply — M2 plus certificates of deposit — will grow 2 percent in the three months ended June 30, after expanding 2.6 percent in the first quarter.
The lack of fresh money flowing into the economy is stifling growth.
Money supply fell at an annual rate of 0.4 percent in March. In the U.S., money supply is rising at an annual rate of about 7.5 percent.
The bank will release its twice-yearly outlook for economic growth and prices April 26.
The bank's move comes on the heels of further gloomy news last week when the government said Japan's still fragile recovery from its worst economic slowdown since World War II is stalling and falling under increasing deflationary pressure.
In its closely watched monthly report for March, the government stressed that the economy remains on track for a self-sustaining recovery. But it said signs of a slowdown in domestic business investment and in the U.S. economy are darkening its prospects.
"There are signs that improvement in the economy is stalling," said the report, which is compiled by the Cabinet Office.
Concern over the health of the world's second-largest economy has contributed to jitters in stock markets around the globe, and prompted expressions of worry from Japan's largest trading partner, the United States.
Prime Minister Yoshiro Mori, whose lame duck status is seen by many as a major contributing factor in Japan's current woes, was scheduled to visit Washington this week, and discuss economic issues with U.S. President George W. Bush.
Japanese Finance Minister Kiichi Miyazawa said last week that he doesn't think more public spending will be needed for the economy to attain government growth targets. The government has said it is targeting 1.2 percent growth this fiscal year and 1.7 percent growth next fiscal year.
In last week's monthly report, the government acknowledged for the first time that Japan is in a state of deflation, adding that the problem has been deepening in recent months. The government defined deflation as "continued price declines."
Declines in prices for real estate and stocks — which now hover at a 16-year low — have been particularly disconcerting.
"The level of concern is pretty high," said Matthew Poggi, an economist with Lehman Brothers in Tokyo. "In Japan, any deflation has a pretty adverse impact on the economy."
The government also took a gloomier view of the domestic labor market, lowering its assessment to reflect a fall in job offers in January.
