Japan: Getting Better, But Slump Will Be Worse In Coming Year

The central bank says the economy has stopped slumping, which is good news.

But that hasn't stopped it from cutting its economic forecasts once again.

The BoJ said the world's second-largest economy will shrink 3.4% in the Japanese financial year ending March 2010.

That's more than the 3.1% predicted in April.

The new forecast would mean the slump this current year would outstrip the 3.3% contraction in the 2009 financial year.

The news came late in trading for the Tokyo Stock Exchange where the Nikkei ended slightly higher, but the broader market fell.

The BoJ forecast said the economy will grow by 1% in the year to March 31, 2011, less than the 1.2% predicted in April.

"Japan's economic conditions have stopped worsening," the bank said, maintaining its view that the country will start recovering in the second half of the year ending March 2010. "Financial conditions, while remaining generally tight, have continued to show signs of improvement."

"Public investment is increasing and exports and production are picking up. Business sentiment, especially of large manufacturing firms, has stopped deteriorating.

"On the other hand, business fixed investment is declining sharply mainly reflecting weak corporate profits.

"Private consumption, while there are some signs of a pick-up due mainly to the effects of various policy measures, remains generally weak amid the worsening employment and income situation.

"Meanwhile, financial conditions, while remaining generally tight, have continued to show signs of improvement.

"The year-on-year rate of change in the CPI (excluding fresh food) has turned negative mainly due to the prices of petroleum products lower than the high levels of a year earlier, in addition to the ongoing substantial slack in the overall economy.

"With regard to prices, the year-on-year rate of decline in the CPI will likely accelerate for the time being.

"However, assuming that medium- to long-term inflation expectations remain stable, the rate of decline in the CPI is expected to moderate from the latter half of fiscal 2009 as the effects of the changes in the prices of petroleum products abate.

"If these developments continue, there are prospects for Japan's economy to return to a sustainable growth path with price stability in the longer run.

"However, the outlook is attended by a significant level of uncertainty stemming mainly from developments in overseas economies and global financial markets