The government upgraded its assessment of the economy for the second consecutive month in February as exports and production continued to recover.
Consumption, however, appears to be slowing amid rising commodity prices, the Cabinet Office said in Monday’s report.
The economy “is showing movements toward a pickup and emerging from a recent pause in activity,” the Cabinet Office said, raising its view from last month’s phrase, “economic movements appear to be pausing.”
The upbeat view on exports is the first in 16 months, while the report on rising production is the second in a row. The drop in private consumption is the first reported in three months.
“Exports and industrial production are showing movements of picking up,” the report said, with a government official underlining robust demand from China and other Asian economies for cars, machinery and electronic parts to be used in smart phones.
Industrial output grew in November and December after dropping for five consecutive months due mainly to slowing production in the information technology sectors in Taiwan and South Korea, which use Japanese parts. The government predicted that Japan’s production index would gain further in January before sliding the following month.
As for Japan’s short-term prospects, the report said the economy would pick up, “reflecting improvement in overseas economies and the effects of various policy measures.” But the Cabinet Office also pointed out downside risks to such a baseline scenario.
The office lowered its assessment of private consumption this month, saying it “is almost flat recently,” a move that was widely expected with the decline in government stimulus measures, such as the Eco-point program for purchasing energy-efficient vehicles and appliances.
Rising oil and other commodity prices could also weigh on the outlook.
Although it left its judgment on price developments unchanged — saying they suggest mild deflation — the office warned that rising import prices for food and energy could hurt public sentiment if companies pass the hikes on to consumers. If they don’t, upward price pressures will directly hit their earnings, it said.
The report kept its assessments of most of the other components of its survey on hold.
Employment remains “severe,” corporate capital spending “is picking up” with improving profits, and business sentiment in the current environment “shows a sign of caution.”
As for overseas economies, the government raised its evaluations of the U.S. and China, as well as the global economy as a whole.
While mentioning a favorable impact from recovering U.S. consumption and robust domestic demand in China, the report highlighted the need for caution toward high unemployment in the U.S. economy, inflationary pressures in China and other emerging economies, and the sovereign debt crisis in Europe.
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