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BOJ says economy improves, no rate rise seen

TOKYO: The Japanese economy is improving, but slowly and fitfully, prompting the central bank to again vow to keep interest rates near zero to prop up the world's second-largest economy.

The Bank of Japan (BOJ) repeated in its latest monthly report that the economy "has recently started to improve", citing an upturn in industrial output and bottoming out of corporate capital spending, which accounts for about 15 percent of economic activity.

Yet personal consumption 60 percent of the economy is weak, as Japanese consumers remain hesitant to spend amid near record high unemployment, corporate downsizing and falling wages.

Underscoring the fragility of the economic upturn, BOJ Governor Masaru Hayami told cabinet ministers that the bank will "continue our bold monetary easing until deflation concerns are wiped away", a pledge he has stuck with for more than a year.

The bank is nevertheless clearly chafing at what it views as an abnormal policy of guiding short-term rates essentially to zero. With the economy showing signs of improvement, markets are eagerly dissecting BOJ statements for clues as to when the bank might scrap the policy.

BANKRUPTCIES JUMP, STRONG YEN

Economists and former BOJ officials generally say the economy, which dipped into recession in the second half of 1999 after a robust first half, is too fragile for the BOJ to raise rates until late this year at the earliest and probably not until 2001.

That view was reinforced by a separate report on Tuesday saying corporate bankruptcies jumped 44 percent in January from a year earlier to 1,441. Total debts left by bust firms fell by a fifth to 604 billion yen ($5.56 billion) but remained high, said credit agency Teikoku Databank.

Also weighing on the economy is the strong yen, which inflames deflationary pressure and erodes the value of Japanese companies' overseas earnings.

The Finance Ministry's currency czar, Haruhiko Kuroda, said the government is still worried that the yen is too strong, despite the currency's dip in recent weeks.

"As we have been saying, we are concerned over the yen's rise that does not reflect fundamentals," he said.

POLICY ON HOLD AS PERSONAL SPENDING SLUMPS

The BOJ restated its fears about deflation, saying downward price pressure remains and it saw no clear signs of a recovery in private-sector demand.

Cheering the BOJ was evidence that a long fall in corporate capital spending was ending while production was improving moderately. Strong machinery orders data released last week showed surprising growth in the October-December quarter and presaged, according to the government, a possible upturn in capital spending by around September.

But while companies are investing in information technology and other strategic areas, they are also reducing bloated payrolls. That will likely keep blunting consumption, the lion's share of the economy, and keep the BOJ cautious.

GOVERNMENT CAUTIOUS, FISCAL SPIGOTS OPEN

The government, meanwhile, also refrained from declaring an economic recovery, maintaining in its own monthly report that the economy was "improving moderately".

Weak personal spending offset the rosier picture for corporate investment in plant and equipment, the Economic Planning Agency said in its report.

Agency chief Taichi Sakaiya said, however, a December consumption fall was due to such one-time factors as a steep fall in semiannual bonus payments and concerns about the millennium computer bug.

Sakaiya said he expects the economy to improve considerably from around October.

But the government will continue stimulating the economy with fiscal spending, Finance Minister Kiichi Miyazawa reiterated.

"Even if the economy were to improve steadily in 2001, I do not think that we could plan to reconstruct Japan's fiscal position as early as 2002," Miyazawa told reporters.-Reuters