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The government kept unchanged its monthly economic assessment for July, saying Wednesday the recovery has lost some momentum and downside risks have emerged in the United States on top of Europe, which has been riddled with sovereign debt woes, but one official suggested the nation is in a “lull.”

In the monthly report, the Cabinet Office said, “Although the economy has been picking up steadily and the foundation for a self-sustaining recovery is being laid, difficult situations remain, including a high unemployment rate.”

The government retained the assessment for the second month in a row, after a modest upgrade the previous month when the word “recovery” was used for the first time in two years.

While acknowledging that some recent economic data in Japan have shown signs of a slowdown, Cabinet Office Parliamentary Secretary Keisuke Tsumura said the figures can be almost flat when converted into a quarterly basis, leading the government to leave the overall assessment unchanged.

Speaking at a news briefing, however, Tsumura warned: “It has been one step before the recovery enters a self-sustaining phase and no progress has been made from there. That is, there is a possibility that the economy is temporarily at a standstill, or I could say there is a possibility that the economy may have hit a lull.”

On the heels of weak economic data in the U.S., the July report added that “attention should be given to the risks that the (Japanese) economy is depressed by a possible slowdown in overseas economies, especially in Europe.”

“We need to closely watch the impact of the U.S. economic developments as possible downside risks,” Tsumura said.

Among specific components, the government revised its assessment on business sentiment for the first time in three months, saying, “Firms’ judgment on current business conditions is improving. However, firms, especially small and medium-size enterprises, are cautious about the immediate future,” although the previous report said only small and medium-size firms were cautious.

Tsumura said the revision has come as some data indicated business confidence at certain major firms, including automakers, is also seen deteriorating in the months ahead.

Assessments on all the other components were kept unchanged.

Exports are “increasing moderately,” while industrial production is “picking up.”

Labor conditions remain “severe” but “movements of an incipient recovery can be seen recently,” it said.

Consumption is also “picking up,” the report said.

The government last used “recovery” in its July 2008 report, saying, “While the economic recovery appears to be pausing, weak movements have been seen recently.”

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