TOKYO, April 24 - A key measure of Japan's economic activity fell in February and corporate sentiment worsened in the three months to March, underscoring the fragility of the economy at a time when export markets seem to be shrinking. Government data on Thursday highlighted the negative impact from uncertainty over the war in Iraq. Officials also expressed concerns about the economic outlook amid the effects of the SARS virus and weak stock prices. While most analysts expect Japan's economy to be supported by surging corporate profits and surprisingly resilient personal consumption, policymakers remain under pressure to tackle a persistent decline in prices. Bank of Japan (BOJ) Policy Board member Kazuo Ueda said he did not see Japan overcoming deflation any time soon, and warned that a further fall in prices could trigger a vicious cycle in an already weak economy.
"I do not see the (annual) rate of deflation turning to zero any time in the near future," he said in a speech to business leaders in Nara, western Japan. At a briefing later, Ueda dismissed calls for radical measures such as adopting an inflation target, saying the absence of such a target was not hampering economic activity and it was unclear what range of inflation would be appropriate. "It is not clear whether we should aim for (an inflation rate of) one to three percent or zero to two percent," he told a news conference. Ueda said a fall in asset prices such as shares and property was severe but a fall in consumer prices was mild. There was no evidence that consumer price deflation was hurting the economy. "However, this does not mean we should leave things alone. Further deflation could trigger a vicious cycle... It is crucial to return the rate of inflation to positive territory," he said.
The BOJ has pledged to maintain its current hyper-loose "quantitative" easing policy -- in which it targets the amount of money in the economy rather than interest rates, already near zero -- until changes in consumer prices stabilise near zero. Consumer price index (CPI) data to be released on Friday is expected to show that core nationwide CPI fell in the year to March 31 for an unprecedented fourth straight year. The government will also release unemployment and household spending figures on Friday.
WEAK ACTIVITY
Data from the Ministry of Economy, Trade and Industry on Thursday showed that the all-industries index, seen as a proxy for gross domestic product (GDP), fell 0.8 percent in February from January. One of its core components, the tertiary sector index, mainly covering the services industry, also fell 0.8 percent. A poll of 17 economists on the economic activity indices last week had produced median forecasts of 0.6 percent declines for both of them. "The all-industries fell slightly less than our forecast, but on the whole it is clearly a weak figure and suggests that overall the economy is struggling at this stage," said Peter Morgan, chief economist at HSBC.
The all-industries index is a wide-ranging gauge including activity in industrial production, construction and services. A survey by the Cabinet Office's research arm showed firms were more pessimistic about business conditions, with the business sentiment index (BSI) for the January-March quarter at minus 27, compared with minus 23 in the previous three months. The survey prompted a downgrade of its view on corporate sentiment for the second straight quarter. "Sentiment among corporations is deteriorating," said Yoshihiko Senoo, the head of economic statistics at the Economic and Social Research Institute of the Cabinet Office. In the survey, which was conducted on March 10, many firms were even more pessimistic about the April-June quarter because of uncertainties over how long a U.S.-led military conflict in Iraq would last, Senoo said.//