Japan downgrades view of economy


The Japanese government has downgraded its assessment of economic conditions for the first time in almost two years due to the strong yen and weak exports.

The cabinet office on Tuesday said Japan’s recovery from its worst post-war recession appeared to be “pausing”, and warned that the economy could soon face weaker overseas demand.

“The risks that the economy [could be] depressed by a possible slowdown in overseas economies, and fluctuations in exchange rates and stock prices are increasing,” the report said.

The more pessimistic outlook did not come as a surprise given recent concerns about the threat of the surging yen on Japan’s economic recovery. Worries about the recovery prompted Tokyo to intervene in the currency markets for the first time in more than six years, selling a hefty Y2,125bn of its currency ($26bn) in September.

The government is drawing up another economic stimulus package while the Bank of Japan has recently announced additional easing measures.

The strength of the yen, which has already climbed past last month’s intervention level to trade at Y81.40, is hurting business confidence and raising worries about its potential impact on capital spending and further hollowing out of the country’s manufacturing sector.

Banri Kaieda, minister for economic and fiscal policy, told reporters he was concerned that an elongated period of the yen rates at around Y81 per dollar would pose a downside risk for capital spending, as many companies had made plans with currency assumptions of around Y89 per dollar.

Exports have been the main driver of Japan’s recovery. However, exporters have faced stiff competition in overseas markets from neighbouring South Korean companies, which have benefit from a relatively weaker currency, helped by what traders see as active intervention in the markets by the country’s authorities.

Prime minister, Naoto Kan, last week urged both South Korea and China to “act responsibly within common rules” on exchange rates, in a unusually strong statement, ahead of imminent G20 meetings that Seoul is hosting.

Yoshihiko Noda, finance minister, also suggested that as the host of the G20, South Korea could face increased scrutiny over its exchange rate policy given Seoul’s own intervention.

But Mr Noda on Tuesday drew back from any implied criticism of South Korea, telling reporters that he had not been referring to a particular currency policy, and was merely highlighting South Korea’s “weighty role” as host at a meeting where foreign exchange issues were likely to be the dominant theme.

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