The BOJ on Wednesday said the economy has almost stabilized, thanks to rising exports and production, but overseas share price falls and a weakening dollar threaten the economic outlook.
Despite sluggish business spending and household consumption, corporate sentiment and profits are rising on the strength of exports and industrial production, the Bank of Japan said, upgrading its assessment of the economy for the fifth consecutive month.
If the trend continues, the economy and domestic private demand will become more stable, but a strong rebound is unlikely, as excessive unemployment and debts continue to restrain growth, the BOJ said.
Recent falls in overseas share prices and the depreciation of the dollar are also causing increasing uncertainty about Japan's frail economy, particularly in the information technology sector, it said.
"It should be noted that further destabilization in the foreign-exchange and financial markets at home and abroad would easily exert a negative influence on the economy," the BOJ said.
Index left unchanged
The government has left unchanged the April reading of the key gauge of the state of the economy at 80 percent and that of May at 100 percent, the Cabinet Office said Wednesday.
The readings of the coincident index mean the gauge topped the boom-or-bust line of 50 percent for four months to May, the office said in an update of preliminary figures.
A reading below 50 percent is considered a sign of economic contraction and a figure above that is viewed as a sign of expansion.
The coincident index hit 100 percent in May for the first time since November 1996. The score indicates improvement in all data included in the index.
In the update, the government revised upward the May reading of the index of leading indicators, a measure of economic trends some six months ahead, to 90 percent from 88.9 percent, while leaving that for April unchanged at 75 percent.
The leading index topped the 50 percent line for the fifth straight month.
The readings of the index of lagging indicators, which gauges recent economic performance, were left unchanged at 66.7 percent in April and 33.3 percent in May. The lagging index fell below the 50 percent line in May for the first time in two months.
The diffusion indexes of the coincident, leading and lagging indicators compare the levels of various economic indicators with their levels three months earlier.
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