TOKYO, Jan 19 - Japan upgraded its assessment of its economy on Monday, saying strong exports are bolstering output and capital spending and beginning to filter through to chronically weak consumption. But the yen's recent strength could be a threat to business conditions and warranted close attention, said the monthly report issued by the Cabinet Office. "The economy is recovering steadily, supported by business investment and exports," it said in an upgrade from the previous report, which cited only an "incipient recovery". It also said employment conditions were improving and that personal spending, which accounts for more than 55 percent of all economic activity, was beginning to recover.
Private consumption was showing signs of a pickup, it said. A government official said it was the first time it had used the term "pickup" to describe consumption since September 1999. Latest figures showed a decline in retail sales in November, but the official said that was likely due to bad weather, and anecdotal evidence suggested consumers spent and travelled more in the winter holidays than in the same period a year earlier. The upgrade comes as little surprise following a series of healthy economic data showed businesses have entered an expansionary cycle, and the new wording highlights the government's confidence that the recovery will be sustained. An independent Japanese research firm, Teikoku Databank, said on Monday that the number of Japanese corporate bankruptcies fell in 2003 for the first time in four years. Bankruptcies fell 14.6 percent from the previous year to 16,624 cases, and total debt owed by firms that went under also fell. The Cabinet Office report echoed comments to a new session of parliament by Prime Minister Junichiro Koizumi, who said the economy was recovering thanks to structural reforms. Economics and Financial Services Minister Heizo Takenaka reiterated at the parliament session, which began on Monday, the government's forecast for the economy to grow by about 2.0 percent in the fiscal year ending on March 31 and by about 1.8 percent in the following year.
ATTENTION TO YEN
But the government hedged its bets by saying in the monthly report that "attention should be given to the development of exchange rates in particular". Japan spent about 20 trillion yen ($187.5 billion) last year to rein in the yen, and traders said authorities likely intervened again on Friday after the yen jumped to three-year highs of around 105.70 to the dollar . Officials worry that a strong yen could hurt exports, the main engine of the nation's fledgling economic recovery. Finance Minister Sadakazu Tanigaki delivered a fresh warning against the yen's rise in his parliamentary speech, warning that the government would keep intervening if it saw the need. "It is important for the currency market to reflect economic fundamentals and move in a stable manner," he said. "We will keep taking appropriate measures as needed while watching movements in foreign exchange closely." The yen traded at around 106.35/40 yen to the dollar on Monday. Traders cited caution ahead of a meeting of Group of Seven (G7) finance ministers and central bank governors set for early February in Florida. Monday's report omitted a reference made in the December report to the stock market as a risk, as share prices have risen steadily over the past month. The market's benchmark Nikkei average <.N225> rose 1.65 percent on Monday to end above 11,000 for the first time since late October.//