Tokyo, April 13 (Bloomberg) -- Japan cut its economic assessment for a third month, giving itsworst verdict of the country's outlook in more than five years as companies trim production. Japan's ``economy is weakening,'' the Cabinet Office said in its monthly report -- the first sinceSeptember 1995 to use the word `weakening' to describe the economy. ``Exports have faltered,reflecting the slowdown of the U.S. economy,'' it said. The run of downgrades, teamed with reports showing exports have fallen, production is beingwound back and business confidence has tumbled, have raised concern a two-year recoverymay already be over. Economy minister and prime ministerial candidate Taro Aso said thegovernment may have to come up with another round of spending to help the economy. The government's downgrade ``is a fair comment,'' said Vincent Musumeci, an economist at ABNAmro Securities (Japan) Ltd. ``It's behind the curve, but at least it's catching up.'' The yen and stocks fell. The Topix index of all shares on the Tokyo Stock Exchanges firstsection dropped 0.5 percent, led by Toyota Motor Corp., Sony Corp and other exporters. Seven-Eleven Japan Inc., the biggest retailer by sales, fell 1.5 percent. The yen fell to 124.36 to the dollar from 123.58 in late New York trade yesterday. Ten-year bondyields fell 1.5 basis points to 1.42 percent after yesterday posting their biggest rise in two weeks on concern the government will sell more debt to fund extra spending.
Zero Rates
The Bank of Japan policy board today unanimously voted to leave interest rates unchanged atclose to zero, and hold the target for banks' current account balances at 5 trillion yen ($40billion). The bank cut rates and increased the current account balance target by 1 trillion yen atits previous meeting on March 19. The three straight downgrades to the government's assessment of the economy mark thelongest run since the three months ended September 1998, when the economy was last inrecession. The Cabinet Office is also more downbeat on profits, business confidence, the labormarket and housing. A report today showed corporate bankruptcies rose 12.2 percent in the fiscal year ended March31, the first increase in three years. ``The word `weakness' means the direction (of the economy) is heading downward,'' saidHaruhito Arai, head of the Cabinet Office domestic statistics department. ``Still, it's too early to determine'' whether the economy is contracting. The economy probably grew by 0.5 percent in the three months ended March 31, according tothe latest Bloomberg News survey, after growing 0.8 percent in the fourth quarter last year. First-quarter gross domestic product figures are due to be released by June 19.
More Spending
Aso, one of four candidates in a Liberal Democratic Party poll to replace Prime Minister YoshiroMori, said that if growth misses the government's 1.7 percent target this fiscal year, or contracts, ``we should compile an extra budget to maintain at least positive growth.'' The race to replace Mori has revolved around what needs to be done to boost the economy. Atabout 130 percent of gross domestic product, Japan's national debt is the biggest in theindustrial world, limiting how much more can be spent. Former prime minister Ryutaro Hashimoto, who heads the ruling Liberal Democratic Party'slargest faction, is favored to win the April 24 ballot. He has apologized for raising the sales taxto5 percent from 3 percent and pursuing other policies during his 2 1/2- year stint as premierwidely blamed for sparking the last recession.
Recession?
The Cabinet Office group that publishes the monthly assessment doesn't declare whether theeconomy is in recession. That is left to a separate government committee which bases itsdecision on the indexes of leading and coincident economic indicators and can wait more than ayear to date recessions. For instance, the group reported in June that the economy had reached its depths of recessionin April 1999. The leading index fell short of the 50 percent mark -- which signals whether the economy willcontract or expand -- for the second straight month in February. A string of readings below thecritical 50 percent mark suggests the economy is weakening. The coincident index, which gauges current overall economic conditions, dropped to its lowestsince December 1998, according to preliminary figures.