TOKYO (MNI) – The Bank of Japan on Monday offered a more positive
outlook, saying the economy is likely to “recover moderately,” an
indication that the direct impact of the financial turmoil in Europe on
sustained growth here will be limited.

“Japan’s economy is starting to recover moderately, induced by
improvement in overseas economic conditions,” the BOJ said in its
monthly economic report for May. “The economy is likely to recover
moderately.”

It was the second straight month of upgrading its overall economic
assessment.

As for downside risks to growth, the BOJ urged a close watch on
“the effects of developments regarding fiscal conditions in some
European economies on international finance and the global economy.”

During the last economic expansion period from February 2002 to
October 2007 — the longest post-war stretch for Japan — the BOJ didn’t
use the term “recovery” to describe the economic climate until October
2003, more than a year after the growth cycle began.

The BOJ then continued using it through June 2006. From July 2006
through March 2008, a few months after the 69-month expansionary phase
ended, the bank used a stronger term “expanding.”

Last month the BOJ said, “Japan’s economy has been picking up
mainly due to improvements in overseas economic conditions and to
various policy measures, although there is not yet sufficient momentum
to support a self-sustaining recovery in domestic private demand.”

“Japan’s economic conditions are likely to continue improving,
although the pace of improvement is likely to be moderate for the time
being.”

This month the BOJ upgraded its assessment of business investment
and personal spending in light of a continued improvement in those areas
confirmed in the first-quarter GDP data released last week.

It said that “business fixed investment is showing signs of picking
up,” which was revised up from “leveling out” seen in the April report.

“Domestic private demand is expected to continue improving, but the
pace of improvement is likely to remain moderate for the time being amid
the strong sense among firms of excessive capital stock and employment,”
it said.

In April the BOJ said, “Private consumption is likely to remain
more or less unchanged for the time being.”

This month the BOJ dropped the reference that “there is not yet
sufficient momentum to support a self-sustaining recovery in domestic
private demand” as the latest data have shown that the labor and income
conditions have stopped worsening.

After a two-day policy-setting meeting on Friday, the BOJ said that
its policy board voted unanimously to maintain the target for the
overnight lending rate among commercial banks at practically zero, at
0.1%, the lowest possible level without hurting market functions.

The BOJ has maintained the target since December 2008, when it
lowered it from 0.3% at the height of the global financial crisis.

On Monday the BOJ left its assessment on financial conditions
unchanged, saying, “financial conditions, with some lingering severity,
have continued to show signs of easing.”

The stimulus effects of low interest rates are still partly
constrained, but the degree of constraint has decreased mainly due to
the improvement in corporate profits.

The BOJ also maintained its assessment of consumer price: “The
year-on-year pace of decline in consumer prices is expected to slow as
the aggregate supply and demand balance improves gradually.”

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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