Bank of Japan downgrades assessment of economy for March - UPDATE

Fri, Mar 7 2008, 07:42 GMT
http://www.afxnews.com

TOKYO (Thomson Financial) - The Bank of Japan (BoJ) has lowered its assessment of the economy in its March report, released Friday, saying the pace of global growth is slowing as higher prices for energy and materials are beginning to weigh on corporate profits.

"Japan's economy is expanding moderately as a trend, although the pace of growth has been slowing, mainly due to the drop in housing investment and the effects of high energy and material prices," the latest monthly report said.

In its February report, the BoJ's opinion was that the economy was expanding moderately as a trend, although the pace of growth seemed to be slowing, mainly because of a drop in housing investment.

By adding another worrying factor and changing the wording of its assessment slightly this month, the central bank is stressing the downside risks to the economy.

The latest report warns of the emerging adverse impact of higher prices for energy and materials on corporate profits.

"Corporate profits have remained high, although they are leveling off," the BoJ said.

The latest quarterly survey by the Ministry of Finance shows that the combined pretax profit of non-financial companies fell for the second straight quarter in the fourth quarter of last year.

Production "has been more or less flat lately, partly in reaction to the relatively large increase in the second half of the previous year," the BoJ said. In February, it said industrial output was increasing.

The BoJ said housing investment has "remained at a low level, although there have been signs of recovery." In February, the BoJ said housing investment had "dropped substantially."

Housing starts dropped at a double-digit pace for the sixth straight month in December after the introduction of tighter building regulations last year, but they registered only a single-digit fall in January.

The BoJ said private consumption, which accounts for 55 percent of the domestic economy, has been firm as household income continues to rise modestly, in line with what it said in February.

Corporate fixed-asset investment, which makes up around 15 percent of the economy, "continued to trend upward," the BoJ said, just as it did in February.

The central bank warned that the trend for industrial output will continue to be flat in the near term, although it is expected to turn upwards further in the future.

In a recent forecast, the Ministry of the Economy, Trade and Industry said industrial output will fall 2.5 percent in the first quarter of this year from the fourth quarter of last year, the first decline in four quarters.

Number of risks

"Exports are expected to continue rising as overseas economies are likely to expand, although at a slower pace," the central bank said.

Fixed investment by businesses and private consumption are "likely to follow an uptrend against a background of generally high profits and a moderate rise in household income."

The latest report points to a number of risks for domestic and global growth.

"Due attention should continue to be paid to factors such as uncertainties regarding future developments in overseas economies and global financial markets, as well as the effects of high energy and material prices," the BoJ said.

On inflation, the central bank sees a rise in corporate goods prices continuing, driven by rising commodity prices in the world market.

"The three-month rate of change in the domestic corporate goods prices index (CGPI) has been positive, mainly due to a rise in international commodity prices," it said.

The CGPI jumped 3.0 percent in January from a year earlier, the fastest rise since March 1981, and the rise in wholesale prices is beginning gradually to push up consumer prices.

"The year-on-year change in the core consumer price index, which excludes fresh food but includes energy, has been rising due to the increase in prices of petroleum products and food products," the BoJ said.

The central bank said the core CPI is expected to follow "a positive trend due to the rise in prices of fuel products and food products in the short run, and the positive output gap in the longer run."

The government said recently that the core CPI rose 0.8 percent in January from a year earlier, following a 0.8 percent rise in December, due to higher prices for gasoline and household goods.

Earlier today, the central bank's policy board voted unanimously to maintain the overnight call rate target at 0.5 percent, as widely expected by the market.

The board meets next on April 8-9.

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