• Kyodo News

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It is too early to be optimistic about the economy because the recovery isn’t self-sustaining and could be derailed by the European Union debt crisis, the government said Monday.

“Although the economy has been picking up steadily, it is only weakly self-sustaining and remains in a difficult situation, such as the high unemployment rate,” the Cabinet Office said in its report for May.

However, it deviated from the previous month’s assessment by taking note of the threats that could emerge from abroad.

“Especially in Europe, fluctuations in the financial and capital markets” are possible factors that could undermine the economy, on top of “a possible slowdown in overseas economies and the influence of deflation,” a phrase that appeared in the previous report.

The report was released after the Bank of Japan last week upgraded its own outlook and said the economy is “starting to recover moderately,” inserting the word “recovery” in its statement for the first time since June 2006.

But Keisuke Tsumura, a parliamentary secretary at the Cabinet Office, said more information is needed to determine whether a recovery is really under way.

“Consumption is steady . . . and we see a number of other bright signs, but we want to see more statistics, especially those for capital spending, before using ‘recovery’ for the whole” and confirm “more autonomous factors.”

Tsumura also warned that the economy is still vulnerable and sensitive to downside risks, noting that the turbulence in the euro-zone economy has already had a knock-on effect on Japan’s financial markets.

The government moderately upgraded its assessment in March, but left it unchanged in April.

There were effectively no changes made to any of the categories in May’s report, except for wholesale prices. That category remained the same except for the deletion of “lately” from last month’s description, which read: “Domestic goods prices are mildly rising lately.”

Exports are “increasing moderately” aided by an increase in exports mainly for Asia, while industrial production is “picking up,” the report says.

Recent price moves show the economy is “in a mild deflationary phase,” it says. Labor conditions remain “severe,” but “movements of an incipient recovery can be seen recently.”

Consumption is “picking up” and is expected to stay solid for a while, partly supported by the start in June of monthly child allowances and the cancellation of tuition at high schools, Tsumura said.

Capital investment is “starting to level off,” and corporate profits are “improving,” the report says.

To determine the trend of capital spending, the government is keeping close tabs on detailed figures for the January-March corporate survey set to be released on June 3 and revised gross domestic product data for the quarter due out June 10.

Preliminary GDP data announced last week indicated that capital spending rose for the second consecutive month.

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