Bank of Japan sees GDP shrinking

Yoko Nishikawa, Reuters, Tokyo

Bank of Japan policymakers on Monday forecast an economic contraction for the current fiscal year, the first admission by the Japanese authorities of a likely recession in the world's second largest economy.

Despite the downgrade in their outlook and data earlier in the day showing weaker-than-expected industrial output, the bank's Policy Board left monetary policy unchanged, a sign of their scant room for manoeuvre in the deteriorating economy.

In their semi-annual report, the BOJ's nine-member board produced a core forecast for economic contraction of between 0.9 to 1.2 percent in the current fiscal year ending March 31.

While virtually all private sector economists have been forecasting an annual contraction for some time, the central bank's board had forecast growth of between 0.3 to 0.8 percent in its previous semi-annual report issued in April.

"I think their outlook is reasonable and in line with market thinking," said Jun Ishii, Chief Bond Strategist at Tokyo- Mitsubishi Securities.

The central bank said in the report that there was greater uncertainty in the economy than usual, stemming from the impact of the Sept.11 attacks in the United States and Japan's reform plans.

Looking further ahead, the central bank said the economy would stop deteriorating towards the second half of fiscal 2002/03, with exports starting to recover.

But there was little room for optimism.

"Even in this case, however, more time will be needed to see a clear recovery as overseas economies will recover only modestly and pressure from structural adjustment on various fronts will persist in Japan."

Despite such an analysis, the board members decided to leave monetary policy unchanged at their meeting.

After easing credit in August and September despite interest rates already near zero, the BOJ had been expected to take a wait-and-see stance.

It has repeatedly suggested that monetary policy alone could not solve Japan's economic woes.

The government is compiling an extra budget totaling some three trillion yen for fiscal 2001/02 but some economists and politicians want it to spend more to give the economy a boost, which could add to Japan's public debt mountain.