TOKYO (AFX-ASIA) - The Bank of Japan upgraded its overall assessment in its March economic report for the first time in 20 months, citing improvement in export and inventory activity. "Japan's economy still continues to deteriorate as a whole, although the downward pressure from exports and inventories is gradually abating," the bank said.
The latest assessment compared with the verdict in the previous report that Japan's economy continues to deteriorate. "The decline in net exports has almost ceased amid the improvement of exporting conditions," the bank said, upgrading the view in the February report that net exports were falling at a "slower pace." The central bank said that reflecting a turnaround in export demand and continued production cut-backs, inventory adjustment "is progressing further in many industries, including electronic parts." In the previous report, the bank said simply that inventory adjustments are progressing.
"Reflecting these developments, the decline in industrial production is moderating further," the BoJ said, compared with the previous assessment that output continued to decline but at a slower pace.
Turning to the outlook, the central bank said the deterioration in the overall economy will further ease in line with the positive impact of a likely turnaround in corporate activity, especially in exports. "The economic deterioration in Japan is projected to moderate steadily as production stops declining mainly due to the recovery in exports."
The BoJ said exports are expected to "turn up towards the middle of this year," citing the improved outlook for the US economy. "Although there still remain uncertain factors, the possibility is increasing that the (US) economy will recover since household spending remains solid and inventory adjustments have almost finished. "Still, the pace of recovery in exports will be modest, while the anticipated expansion in overseas economies is only gradual and final demand for IT-related goods worldwide remains stagnant for the time being."
The BoJ, while noting the positive developments, warned of the continued severity surrounding the overall economy, citing concerns over the household sector. "Companies maintain their stance on reducing personnel expenses ... hence, the severity of employment and income conditions of households is rather intensifying, with unemployment being on a rising trend while the rate of declines in wages is expanding." The BoJ said that given the severe employment and income conditions, "private consumption is likely to remain lackluster." Business fixed investment is also expected to continue its downtrend, the central bank, said, citing the decline in corporate profits.
"Consequently, it may take quite a while for economic activity as a whole to stop declining." The BoJ noted that overall prices are expected to follow a "gradual declining trend for the time being, as negative supply and demand conditions in the domestic market will keep exerting downward pressure on prices.
"Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will further intensify downward pressure on prices continuously warrants careful monitoring." The BoJ also warned of severe corporate finance conditions due to the underlying concerns over credit risk. "The fund raising conditions of firms with high credit risk, especially among small firms, are becoming severe as private banks and investors are becoming more cautious in taking on credit risk," it said.