Tokyo, Jan. 22 (Bloomberg) -- The Bank of Japan lowered its economic assessment for thesecond straight month, saying exports and industrial production are slowing as a drop inoverseas demand takes its toll at home. ``Net exports are starting to decrease, reflecting the slowdown in overseas economies suchas the U.S. and East Asia,'' the BOJ said in its January report. ``Industrial production remainson a rising trend, but the pace is slowing considerably.'' When the central bank cut its assessment last month, it warned exports and industrial outputmay slacken as economies in the U.S. and Asia slow. Japan's exports are starting to ``leveloff'' and customers in Asia are beginning to pile up inventories, the BOJ said last month. In today's report, the bank was more pessimistic, saying ``the downward pressure fromslowing overseas economies and weak markets need more careful monitoring for time being.'' Japanese bonds rose a second day after BOJ Governor Masaru Hayami said Friday the bankis considering expanding the supply of money to damp investors' concerns the country'sbanks will be hit with crippling losses by a nine-month slide in the stock market. His statement showed that while he isn't ready yet to cut rates, he is worried about the effectof a stock market slump on confidence among investors and consumers. The benchmarkNikkei 225 stock average has shed one-third of its value the past nine months. Hayami will hold his monthly press conference at 4 p.m., Japan time, Tuesday. ``With stocks falling and U.S. economy decelerating, things are moving in a direction that willhurt Japan,'' said Tomoko Fujii, senior economist at Nikko Salomon Smith Barney Ltd. ``TheJapanese economy is heading downward, and the BOJ can't avoid downgrading theassessment.''
Interest Rates
The BOJ has held the interbank overnight loan rate, equivalent to the U.S. Federal Reserve'sfederal funds rate, at 0.25 percent since raising the rate from near zero on Aug. 11. The bank said prices ``are expected to be somewhat weak for the time being,'' sticking to thelanguage of the previous report. Even so, the central bank warned inroads into the gapbetween demand and supply were starting to peter out. The bank said it's watching whether falling stock prices are affecting bank lending. The mainNikkei 225 index has lost one- third of its value in the past nine months, sparking concernJapan will return to recession as banks are forced to write down the value of stocks they ownor hold as collateral, driving them into insolvency and starving the economy of loans. The bank forecast the main measure of money supply, M2+CD's, will rise about 2 percent inthe first quarter. The bank's decision to lift rates in August was made in the face of strong opposition from thegovernment, which meddled in interest rate policy before a law giving the BOJ independencewas passed in 1998. Two of the nine BOJ policy panel members voted against the rate rise.