Japan's Recovery Accelerating, Central Bank Says

Japan received a brighter assessment of its economic future Friday, with a key central bank report highlighting an accelerating recovery and easing price declines.

In its semiannual outlook, the Bank of Japan predicted that the world's second biggest economy would see faster growth this fiscal year, which began April 1, and a possible end to deflation within two years. Gross domestic product will probably expand 1.8 percent this year, the central bank said, better than its previous forecast of 1.3 percent.

The report credited robust growth in overseas markets, particularly in Asia, for fueling Japanese exports and production. Stock prices and corporate profits are up. That should boost capital expenditures and eventually lead to more jobs, higher wages and stronger domestic demand.

"Given these developments, the momentum for a self-sustaining recovery in private consumption is likely to build gradually," the BOJ said.

Japan, meanwhile, remains the slowest growing economy in Asia despite optimism about the short term. It must face harsh realities in the years ahead, and the central bank warned of skyrocketing public debt, a shrinking population and a new global economic order.

"It is becoming clear that a substantial change in the global economic structure is taking place, and each economy faces new challenges to achieve more balanced sustainable growth," it said.

The world is not returning to its pre-financial crisis state, the central bank said. The growing influence of emerging economies and commodity exports has "significantly affected" resource prices and global capital flows. Advanced economies have taken on unprecedented levels of debt to fund fiscal stimulus programs. And the global economy faces the prospect of new financial regulations that could stymie markets.

The eight-member policy board voted earlier in the day to keep its key interest rate near zero and said it would redouble efforts to boost the economy. It vowed to maintain an "extremely accommodative" monetary policy to keep credit flowing and fight deflation.

Board members agreed the central bank needed to do more to "contribute to strengthening the foundations for economic growth," signaling a more proactive approach. As part of those efforts, Bank of Japan Gov. Masaaki Shirakawa has directed staff to find ways of financially supporting banks.

For now, Japan's economy still needs all the help it can get.

Government data Friday showed that the country's recovery, though advancing, remains uneven. Unemployment worsened, and prices continued to fall in March. At the same time, household spending rose and factory output expanded.

Japan's seasonally adjusted jobless rate rose to 5 percent in the first increase in five months. The figure is up from 4.9 percent in February and missed Kyodo News agency's forecast for the rate to be unchanged.

The number of jobless totaled 3.5 million during the month, up 4.5 percent from a year earlier. Those with jobs fell 0.6 percent to 62.1 million.

Goldman Sachs economist Chiwoong Lee describes the labor market as having "no spark."

"Viewed over several months, the path is flat," he said in a note to clients. "Deterioration has eased but not given way to improvement."

That has dragged prices lower as stores scramble to attract increasingly finicky consumers.

Japan's core consumer price index, which excludes prices of fresh food, declined 1.2 percent in March from a year earlier. The result marked the 13th straight month of decline. Prices fell for a swath of goods from fuel to furniture.

Lower prices may seem like a good thing, but deflation plagued Japan during its "Lost Decade" in the 1990s. It can hamper economic growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.

Core CPI for the Tokyo area, seen as a barometer of future price trends nationwide, retreated 1.9 percent in April. In its report, the central bank said CPI may turn positive next fiscal year starting April 2011.

Preliminary data show industrial production edged up 0.3 percent in March from the previous month on growing export demand. Contributing to the rise were makers of electrical machinery, transport equipment and steel products, the Ministry of Economy, Trade and Industry said.

The reading undershot Kyodo's forecast for a 0.8 percent rise. The survey predicts that factory output will jump 3.7 percent in April, then slip 0.3 percent in May.

Shipments in March rose 1.6 percent, while inventory declined 1.6 percent.

The government also said household spending during the month jumped a real 4.4 percent from a year earlier. Economists credit the solid figure to tax breaks and other government incentives to spur shopping. But they warn that consumption may wane once the programs end later this year.