The Bank of Japan on Friday upgraded its economic assessment for the first time in 20 months, citing improvements in exports and inventories.
“Japan’s economy still continues to deteriorate as a whole, although the downward pressure from exports and inventories is gradually abating,” the central bank said in a monthly report on recent economic and financial developments.
Earlier this month, the government also upwardly revised its overall economic assessment for the first time since the economy fell into recession in November 2000, saying the economy is beginning to show signs of bottoming out.
In its previous report in February, the BOJ said Japan’s economy continues to deteriorate, though exports are declining at a slower pace and inventory adjustment is progressing.
In the March report, the central bank said exports “are expected to turn up toward the middle of this year” due to an economic recovery in the United States and ongoing inventory adjustment in the information technology sector.
“The synchronized inventory adjustment in IT-related goods worldwide is nearing an end,” the report says, adding East Asian economies appear to have hit bottom because of this development.
“As for the U.S., the possibility is increasing that the economy will recover since household spending remains solid and inventory adjustment has almost finished.”
On the economic outlook, the BOJ said: “Overall, economic deterioration in Japan is projected to moderate steadily, as production stops declining due mainly to the recovery in exports.”
The central bank, however, warned against optimism.
“It may take quite a while for economic activity as a whole to stop declining” due to weak corporate capital investment and personal consumption, it said.
“With respect to domestic demand, business fixed investment is expected to follow a downtrend reflecting the fall in corporate profits,” the report says. “Private consumption is also likely to remain lackluster, mainly due to worsening employment and income conditions.”
The central bank also said it is necessary to continue paying close attention to risks.
“Still, while the economy continues to be fragile, continuous attention should be paid to the risk of a negative impact from developments in foreign and domestic financial markets,” the report says.
The BOJ said downward price pressure will continue due to weak domestic demand, falling real wages and other factors.
“Overall, prices are expected to follow a declining trend for the time being,” the report says. “Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will further intensify downward pressure on prices warrants careful monitoring.”
The BOJ as well as the government is placing top priority in overcoming deflation and resolving nonperforming loans to improve the overall economy.
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