TOKYO (AFX-ASIA) - The Cabinet Office, formerly known as the Economic Planning Agency, downgraded its key economic assessment in its April report for the third consecutive month, saying the economy is now weakening in line with the sharp deterioration of corporate activity.
This was the first time that the Cabinet Office has made the third consecutive downgrade to the monthly economic report since it did so between July and September of 1998, when the economy subsequently fell into a vicious cycle.
"The economy is weakening," the Cabinet Office said in a report presented to the cabinet this morning.
This is the first time the Cabinet Office has used the word "weakening" in its monthly report since September 1995. This compares with the analysis in March that "economic recovery appears to be pausing."
The Cabinet Office in the latest report emphasised the sharp deterioration of corporate sentiment and outright moderation of a growth in corporate earnings, as well as declines in industrial output amid continued weakening of the global demand.
"Reflecting the slowdown of the U.S. economy, Japanese exports have faltered, resulting in a decline of industrial output," the Cabinet Office said.
"Corporate profits are slowing down and business sentiments are deteriorating sharply, especially in the manufacturing sector." Until last month, the Cabinet Office stated that corporate profits were rising sharply, while improvement in corporate sentiment came to a pause.
The Bank of Japan's quarterly Tankan survey, published earlier this month, showed that the sentiment DI for large manufacturers fell to minus 5 in the March report from plus 10 in the December survey. The same survey also found that aggregate pretax profits of the surveyed firms will fall 1.0 pct year-on-year in the second half to March 2001 after registering a 27.7 pct rise in the first half to September.
"It seems that the strong growth trend of corporate profits began to collapse suddenly since the beginning of the new year," said Cabinet Office economist Haruhito Arai.
The Cabinet Office, citing the faster-than-expected deterioration in the corporate sector activity, which had supported the broader economy in recent years, said in the April report that momentum "towards self-sustained recovery in the corporate sector has become weaker."
Arai noted that the extent of the deterioration of industrial output and corporate sentiment "resembled the phenomenon often seen in the early phase of any vicious cycle in the past."
"Corporate capital spending, judging from the latest Tankan report, may begin to fall as early as from the April-June quarter, although we had earlier thought that growth would continue until around mid-year," he said.
The Tankan survey showed that the surveyed large firms plan to cut aggregate capital expenditure by 4.7 pct in the year to March 2002 after boosting outlays by 4.5 pct in the year to March 2001.
Nevertheless, Arai said it was "premature" to conclude that the economy has slipped into a vicious cycle already, adding that "we still do not have enough evidence" to support the view that the ongoing weakening will be sustained.
According to Arai, the Cabinet Office always judges the economic phase by two criteria -- the extent of any observed weakening of the broader economy and the durability of such a weakening. The Cabinet Office, while saying momentum towards autonomous recovery is weakening, also said that such momentum "still continues," citing the continued rise in corporate capital spending. "Corporate capital spending is rising and it is expected to maintain a solid movement in the near-term," the Cabinet Office said in the April report. Arai said his office will also assess if the latest Bank of Japan decision to reinstate the zero call rate policy, the introduction of the new emergency stimulus package and the devaluation of the yen will have any positive impact on the economy, before judging whether the economy is slipping into a serious falling cycle.