TOKYO (AFX-ASIA) - The Bank of Japan kept its economic assessment unchanged in its May report, saying that the economy continues to stay in an adjustment phase in line with sluggish corporate sector activity.
"Adjustments in economic activities have been underway, as production is declining, reflecting a fall in exports," the BoJ said in its May economic report.
The latest analysis contained no change in the assessment shown in the April report.
However, the bank highlighted a further weakening of corporate activity, including production and investment, amid growing uncertainty over the global market.
"Business fixed investment seem to be levelling off, while exporting conditions continue to deteriorate," the bank said. Until last month, the bank said business fixed investment was rising.
The bank said industrial output, meantime, "is declining sharply, while excessive inventories of electronics parts and some materials are building up."
As a result, the BoJ continued, the environment surrounding corporate profits "is becoming more severe," adding that "business sentiment is worsening particularly in manufacturing sector. The BoJ also noted the emerging negative impact of a slowdown in corporate activities on the household sector.
"Income conditions of households have not deteriorated but the decline in production is starting to affect the household sector mainly through the decrease in hours worked," the bank said.
The central bank also warned of the sustained sluggish economic activity ahead, citing downside risk in net exports and industrial output, as well as on corporate profits and capital spending.
"Overall, the adjustments are expected to continue for some time, mainly in production," the bank said.
"Attention should still be paid to the possibility of a prolonged deceleration of overseas economies and risks of a negative impact on the economy induced by developments in foreign and domestic capital markets through corporate and household confidence."
The central bank said net exports are likely to maintain a falling trend, while inventory adjustment, mainly in electronics parts, is expected to continue for the time being.
In addition, "business fixed asset investment is projected to peak out and then to start a downturn, as the effects from the implementation of a backlog of orders ... dissipates," the bank added. "Thus, industrial output is expected to follow a declining trend ... (and) corporate profits are likely to start decreasing."
The bank said that if this happens, "household incomes are expected to weaken gradually."
The central bank also warned of deflationary pressure building up in the latest report, adding that "overall, prices are expected to be weak for the time being," even if the yen's fall is alleviating the extent of weakness in prices.
"Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will intensify downward pressures on prices warrants careful monitoring."
The bank, meantime, said the Japanese economy may see some relief from an expected pick-up in the U.S. economy and in the depreciation of the yen.
"It is generally thought that overseas economies, particularly the U.S., will follow a gradual recovery trend from the latter half of 2001," the bank said.
"In this case, together with the effects from the depreciation of the yen, exports are expected to underpin the economy once again."