The nation's coincident index stayed below the boom-or-bust line of 50 percent for the 13th straight month in January, according to a government report released Thursday.

The key economic gauge is expected to log an upward turn soon, however, given the ongoing progress in inventory adjustment, the Cabinet Office said in its preliminary report.

The coincident index stood at 33.3 percent in January, up from a revised 20 percent in December. Any reading below 50 percent is considered to be a sign of economic contraction, while any figure above this line is viewed as a sign of expansion.

But the index of leading economic indicators, which measures economic growth six to nine months ahead, stood at 75 percent, having risen above the 50 percent line for the first time since October 2000. This is against a revised 36.4 percent logged in December.

The Cabinet Office attributed the improvement in the leading index to the progress in inventory adjustments for final demand goods and industrial production goods.

"Inventory adjustments made progress in January, especially those in video game consoles, coats, cosmetics and electric machinery," said Yoshihiko Senoo, director of the business statistics department at the Economic and Social Research Institute, which operates under the auspices of the Cabinet Office.

Senoo said the inventory adjustment rate index for final demand goods fell 5.3 percent in January, while that of industrial production goods dipped 4.2 percent.

"With progress in inventory adjustments in these sectors, which will lead to a production increase, the coincident index could rise to around 50 percent in February," he told reporters.

A 7.7 percent rise in large condominium starts in the Tokyo metropolitan area in January also pushed up the leading index to its highest reading since it logged a reading of 83.3 percent in August 2000.

Senoo cautioned the public against overestimating the significance of this reading, however, noting that the coincident index shows the economy is still in a serious condition.

"Given the current state of the economy, it's hard to make a positive forecast on (personal) consumption and sustainability in inventory adjustment improvement," he said

The government still needs to closely monitor the economy of the U.S., Japan's largest trading partner, along with domestic demand, he added.

The coincident index rose in January due to an increase in sales at department stores as well as an improvement in the indexes for industrial production shipments and for investment goods, excluding transport machinery.

Meanwhile, the lagging index, which gauges recent performance, came in at 16.7 percent, down from a revised 33.3 percent.

The diffusion indexes of the coincident, leading and lagging indicators compare the current levels of various economic indicators with their levels three months earlier.

The latest report includes components such as production, use of large-lot electricity, corporate operating profits, unemployment rates and Tokyo share prices.

FSA easy on banks

Hakuo Yanagisawa, state minister in charge of financial affairs, on Thursday assured banks that they need not worry about their loans to small and midsize firms during ongoing inspections by the Financial Services Agency, saying the FSA is supposed to inspect the loans more flexibly than those to bigger firms.

The comments came as Yanagisawa was asking the banks to continue providing sufficient funds to small and midsize companies toward the banks' book-closing on March 31.

He told a gathering of representatives from commercial banks, credit unions and public lenders that while it is important for banks to maintain liquidity ahead of April 1, when the government partially lifts its blanket guarantee on bank deposits, he would like banks to smoothly provide funds.

Yanagisawa is apparently concerned that banks will tighten their lending as the new fiscal year approaches. Starting April 1, the government will cap the guarantee of time deposits at 10 million yen plus interest, per depositor, in the event of a bank failure. The move could trigger a shift of time deposits out of teetering banks.