TOKYO (MNI) – The Bank of Japan on Monday kept its assessment of a
weak Japanese economy from the previous month in the wake of the March
11 earthquake and tsunami but maintained its medium-term recovery view.

“Japan’s economy faces strong downward pressure, mainly on the
production side, due to the effects of the earthquake disaster,” the BOJ
said in its monthly economic report for May.

It also said, “Production has declined sharply due to the
supply-side constrains caused by the disaster. As a result, exports have
decreased substantially, and domestic private demand has also been weak
partly affected by a deterioration in business and household sentiment.”

In April, the BOJ said, “The earthquake has sharply dampened
production in some areas by damaging production facilities, disrupting
the supply chain, and constraining electric power supply; exports and
domestic private demand have been affected accordingly.”

As for the prospects for the economy in the future, the BOJ
repeated the view presented in April, saying, “Japan’s economy is likely
to continue facing strong downward pressure, mainly on the production
side, for the time being.”

“But (it) is expected to return to a moderate recovery path as
supply-side constrains ease and production regains traction,” the
central bank said.

The latest report also said, “Production is expected to remain at a
low level for the time being, but is likely to start increasing as
supply-side constrains ease. In such a case, exports are expected to
turn upward reflecting the improvement in overseas economic conditions.”

“Business fixed investment, and public investment are also expected
to increase gradually, mainly due to growing demand for the purposes of
restoring capital stocks,” the BOJ added. “Meanwhile private consumption
is expected to pick up partly due to the improvement in household
sentiment as production begins to recover.”

As for its view on inflation, the BOJ in large part kept its
outlook the same as in April, saying, “The year-on-year rate of change
in the CPI is expected to become slightly positive.”

But the BOJ warned, “The year-on-year rate of change in the CPI is
likely to be revised downward with the base-year change scheduled for
August 2011.”

“Financial conditions have generally continued to ease, although
weakness has been observed in the financial positions of some firms,
mainly small ones, since the earthquake.”

The latest report also said, “Issuing conditions for CP have
recently resumed at a gradual pace after a pause following the
earthquake.”

At a two-day policy setting meeting which ended last Friday, the
BOJ’s policy board voted unanimously to continue the bank’s very
stimulative, practically zero interest rate policy by maintaining the
target for the overnight call loan rate among commercial banks in a
range of zero to 0.1%.

The BOJ on Friday warned of the outlook for the Japanese economy,
saying, “there is a high degree of uncertainty about the effects of the
earthquake disaster on Japan’s economy.”

It also said, “for the time being, attention should be paid to the
downside risks to economic activity, especially the possible effects of
the disaster.”

BOJ Governor Masaaki Shirakawa on Friday said Japan “cannot be
optimistic” about its long-term electric power supply given higher
uncertainty over prospects of resuming nuclear power reactors that are
currently down for routine inspections across the country amid growing
fears of radiation leaks.

tokyo@marketnews.com
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