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Bank of Japan gives upbeat report on economy

TOKYO: Japan's central bank issued an upbeat monthly report on Friday, saying the world's second largest economy showed signs of emerging from years of recession, spurred on by burgeoning private capital spending.

That relatively good assessment won unusually strongly worded backing from the two senior government ministers charged with guiding the economy back onto a path of growth.

"The Japanese economy is definitely heading for a recovery," Economic Planning Agency chief Taichi Sakaiya told reporters.

However, some economists have warned that the recovery remains fragile, with the all-important private consumption indicator still flagging even though data at the end of this week has pointed to an upturn in capital expenditure.

"Overall, the economy is clearly starting to get out of recession and we shouldn't worry," said Finance Minister Kiichi Miyazawa, usually among the more cautious of Japan's notoriously guarded politicians.

The Bank of Japan kept its basic assessment of the economy unchanged in its report for March, but gave slightly higher marks to some areas, including corporate investment.

"Japan's economy has recently started to improve. The economic environment surrounding private demand is improving, as seen in the continuing increase in corporate profits," it said.

The central bank said the decline in capital investment had almost stopped after years of falls. Its previous report had said only the drop in capital investment was coming to a halt.

DATA SURPRISES

It follows some surprisingly strong data for this year, including Thursday's release of January private machinery orders that stunned traders with a rise of 0.8 percent. Analysts had been expecting an eight percent drop.

"The references to capital spending show the BOJ is more confident about seeing a rebound in capex," said Soichi Okuda, senior economist at Nippon Credit Bank.

The report helped to push the yen up against the dollar, and added to a positive tone in Tokyo's stock market, while knocking down bond prices, which often flinch at positive economic news.

"The phrasing in the report indicates that the bank is now more convinced that private-sector demand is moving towards recovery," said Okuda.

Markets were also digesting data showing a surplus in Japan's current account the economy's broadest measure of trade in goods and services fell 22.8 percent in January from a year earlier to 610.9 billion yen ($5.74 billion).

FURTHER STRENGTH NEEDED

However, economists said the figures were not yet strong enough to lead the BOJ to contemplate a possible shift from its unprecedented zero-interest rate policy.

"This is certainly indicative that things are moving up and the economy is moving," said James Malcolm, economist at J.P. Morgan. "But it is too early to say they are taking a step toward hiking interest rates."

Bank of Japan governor Masaru Hayami repeated on Friday that the BOJ will maintain its zero interest rate policy until deflationary concerns disappear, saying he does not have a date in mind for ending the policy.

"Recent strong economic data since the end of last year show that the path to Japan's economic recovery is clear," he said.

The BOJ report precedes Monday's gross domestic product figures that are expected to show the economy slipping technically back into recession in the second half of 1999.

A smaller-than-expected fall in corporate capital spending on Thursday prompted economists to nudge up forecasts for third quarter GDP in a Reuters survey. The capital spending accounts for about 16 percent of GDP.

A median forecast of 19 economists for October-December GDP was revised up to a contraction of 1.0 percent from the previous quarter from a 1.1 percent fall predicted last week.-Reuters