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Improved consumption key to recovery, BOJ says> Economic growth has been slowing since April and business sentiment has weakened, but there are no signs of a sharp decline in corporate profits, employment and income conditions, the Bank of Japan said Oct. 27.

In its quarterly economic outlook, the central bank also said recovery is likely to gradually gather momentum again if household spending picks up and inventory adjustment pressures steadily subside.

The BOJ said that for sustained recovery, personal consumption needs to improve before the pace of income growth decelerates further. However, the central bank refrained from forecasting when that will happen. In the previous report released in July, the BOJ expressed more optimism, saying the economy was expected to continue recovering.

The BOJ cited three reasons for weak personal consumption: the aftereffects from rush purchases prior to the consumption tax hike in April; the fall in real purchasing power due to fiscal measures, including the consumption tax hike and the end of special tax cuts; and slower income growth.

If household expenditures help lift inventory adjustment pressures at an early stage, a positive cycle in production, income and expenditures will solidify, according to the report. However, the central bank also pointed to uncertainties, saying personal consumption is susceptible to psychological factors.

Passenger car sales, which remain sluggish after the boom before the April tax hike, need close attention, the report says, noting that the sales have a considerable effect on the overall manufacturing sector. The BOJ said corporate profits and employees’ income have been supported by an increase in both exports and capital investment.

Conditions for exports are unlikely to worsen dramatically because the share of exports to the Association of Southeast Asian Nations member economies, currently mired in currency turmoil, is small while the economies of Japan’s other trading partners, including the U.S., are expected to grow, the report says.

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