The government has downgraded its assessment of the economy for the first time in 10 months as analysts forecast that gross domestic product will shrink this quarter.
Risks include a “further slowing down of overseas economies and sharp fluctuations in the financial and capital markets,” the Cabinet Office said in its monthly report released Tuesday, cutting the evaluation of the global economy.
The government cut its view on personal consumption, home-building, exports, imports and industrial production, while raising its assessment of the labor market.
The Bank of Japan next meets Sept. 18 and 19 to review monetary policy.
Global investors are meanwhile awaiting a Friday speech by Federal Reserve Chairman Ben S. Bernanke to gauge the outlook for stimulus in the U.S.
“Europe’s debt crisis is having the effect of a body blow to Japan’s economy,” said Yoshimasa Maruyama, chief economist at Itochu Corp.
“Concerns over Japan’s economic outlook will probably build pressure on the BOJ to apply more monetary stimulus,” said Maruyama, who says the central bank could move in October.
JPMorgan Securities Japan Co. forecasts a 0.3 percent annualized decline in gross domestic product in the three months through September, while BNP Paribas SA estimates a 0.9 percent fall. The median estimate in a Bloomerg survey compiled this month was for 1 percent growth, partly supported by earthquake reconstruction work.
Grappling with the world’s biggest public debt burden, the government is also at risk of a financing crunch.
Finance Minister Jun Azumi said Tuesday that government funds may “dry up” if a financing bill fails to clear the Upper House. “We’d have to consider how to save money while trying to avoid affecting Japanese people’s lives as much as possible,” he said.
“The Japanese economy is on the way to recovery at a moderate pace, partly due to reconstruction demand, while some weak movements are seen recently,” the Cabinet Office said.
The government lowered its economic evaluation of the U.S., Europe, China, the rest of Asia except India, and said Japan’s overseas shipments are “growing weaker.”
European austerity measures, U.S. unemployment and China’s slowdown are weakening global demand. Japan’s big trade deficit in July and slowing economic growth in the second quarter highlighted pressure on the Bank of Japan and the government to add stimulus.
In the labor market, there are “signs of improvement, although some severe aspects still remain,” the government said Tuesday. The unemployment rate fell 0.1 percentage point to 4.3 percent in June, while the jobless rate for people aged 15 to 24 dropped 0.9 point to 7.4 percent.
The government said it will work with the BOJ to counter deflation.
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