TOKYO, Oct 15 - Japan's government kept its assessment of the economy unchanged in October after two successive months of upgrades, saying there are signs of a recovery but also concerns over the nation's surging currency. "The economy is showing signs it is headed for a recovery," the Cabinet Office said in the headline phrase of its monthly report, using the same wording as its September report, which was an upgrade to August's verdict that the economy was flat. The report is in line with recent data showing the economy is finally stirring from a decade of stagnation -- good news for a government facing a general election next month -- and follows an upgraded assessment from the Bank of Japan in its October report released on Tuesday.
But both reports stopped short of calling the recovery a full-blown one, noting that uncertainty over overseas economies and the rise of the yen in recent weeks is casting a shadow on the outlook for exporters, the main drivers of the recovery. The Cabinet Office said exports had the basis for a recovery, a slight change in its wording from September, when it said that exports were recovering. An official told reporters that the new wording did not constitute a downgrade, but reflected greater uncertainty over the outlook for exporters because of the strong yen and a lack of clarity over economic conditions in Japan's major markets. The yen has risen over seven percent against the dollar in the last month, reaching a three-year high of 108.28 yen on Friday. It was trading at around 109 yen late on Wednesday. Exporters' profits suffer when the yen rises because a strong yen cuts overseas revenues when they are converted back into the Japanese currency and also makes their products more expensive. Bank of Japan Governor Toshihiko Fukui became the latest Japanese official to voice concern about the yen, telling a news conference on Wednesday that excessive movements in currency rates could hamper Japan's economic recovery. Officials have also stepped up warnings that they will intervene to rein in the currency when needed to give exporters a helping hand, despite comments from U.S. President George W. Bush that he would use his forthcoming visit to Asia to express his opposition to Japan's intervention policy. The government report showed just how crucial exports are for the recovery, noting that domestic personal consumption, which accounts for over half of Japan's economy, remained flat, though there were signs of an improvement in consumer sentiment. While new investment by businesses continues to pick up and profits rise, output remains flat and employment conditions severe, though there are signs of improvement, the report said.
The official said any pickup in exports and domestic demand should feed into increased output, though it was unclear when this would happen. Separate government figures on Wednesday showed that industrial output in August fell a revised 0.7 percent, greater than a preliminary 0.5 percent fall reported earlier.//