Monday, 18 January 2010

BoJ raises economic assessment but Japanese recovery still at risk

The Bank of Japan has raised its economic assessment for four of the country’s nine regions but some of the recent economic data show that the Japanese economic recovery may still be a difficult one.

Today, the Bank of Japan released its regional economic report for January. The report noted that "the economy had picked up in all regions", with four regions reporting an improvement in the economic trend and five maintaining their assessments compared with October 2009.

Also today, the Ministry of Economy, Trade and Industry released final industrial production data showing that output increased 2.2 percent in November after having increased 0.5 percent the previous month. The increase is less than the preliminary estimate of 2.6 percent.

While the Bank of Japan's latest report and the industrial production data indicate that the economy remains on a recovery path and is likely to expand again in the fourth quarter, reports last week indicate that the outlook for the Japanese economy is far from robust.

Data from the Cabinet Office's economy watchers survey indicate that the recovery may have lost some momentum.

In the survey report released on Tuesday, the diffusion index for current conditions rose to 35.4 in December from 33.9 in November. However, this was after two consecutive months of declines, including a record seven-point decline in November.

The diffusion index for future conditions also rose in December to 36.3 from 34.5 in November after two consecutive months of declines.

Machinery orders data released by the Cabinet Office on Thursday also indicate that the economy faces headwinds with respect to business investment.

Core private sector machinery orders declined 11.3 percent in November to 625.3 billion yen. This was the lowest monthly reading since this report was first compiled in April 1987. The weakness in machinery orders is in sharp contrast to the recovery in industrial production so far.

The decline in machinery orders, however, is consistent with the Bank of Japan's report today which noted that business fixed investment "either continued to decline substantially or remained at a low level in all regions".

Newly-appointed Japanese Finance Minister Naoto Kan noted the fragility of the economic recovery in his first speech to the lower house of parliament today.

"Japan's economy is picking up but it lacks self-sustaining strength, and the situation remains severe," Kan said. "Looking ahead, there are risks such as a further worsening of the employment situation and deflation, and the foundations for the economy to return to a strong private demand-led growth path remain fragile."

So while the Japanese economy probably maintained its expansion in the fourth quarter, doubts about the strength of the economic recovery will continue.

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