Bank of Japan warns recovery has stopped

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Wednesday, March 21 1:49 PM SGT

Bank of Japan warns recovery has stopped TOKYO, March 21 (AFP) - Japan's economic recovery has come to a standstill, the Bank of Japan said Wednesday in a pessimistic new evaluation two days after it launched a drastic policy about-turn in a bid to quell deflation.

"The recovery in Japan's economy has recently come to a pause, reflecting a decrease in exports," the central bank said in its monthly report, which downgraded the February assessment that the economy was recovering "gradually."

"Overall, the economy will likely remain stagnant for some time," the report warned.

The US economic slowdown hit Japan's trade surplus hard in February, depressing it by 25.4 percent year-on-year to 879.4 billion yen (7.2 billion dollars), the finance ministry said Wednesday.

The Bank of Japan also warned that there was little end in sight to deflation, which is undermining hopes for recovery in the world's second-biggest economy.

"Overall, prices are expected to be somewhat weak for the time being," the monthly report said.

"Moreover, given the high uncertainties regarding future economic developments, possibilities that weak demand will intensify downward pressures on prices warrant careful monitoring."

Seeking to fight two years of falling consumer prices, the Bank of Japan on Monday announced its effective return to zero interest rates through an increase in the money supply and the adoption of an inflation target.

The Bank said it would retain rock-bottom borrowing costs until the core consumer price index stopped falling -- which analysts say is unlikely to happen for another two years.

The move came after months of government pressure on the central bank to do more on the monetary policy side to galvanize growth, after it had controversially abandoned zero rates last August.

The Tokyo stock market, reacting for the first time to the Bank of Japan U-turn after a public holiday on Tuesday, rose on hopes the relaxation would be coupled with a bigger drive to clean up Japanese banks' vast bad debts.

HSBC Securities chief strategist Garry Evans said he had laid down three conditions to stop the rot in the stock market: a major policy shift by the Bank of Japan, resolution of banks' bad debts and political reforms.

"The first of these conditions has now been met. The second has not yet, but the chances of it happening are rising. Politics, sadly, remains a disaster area," Evans said.

"At the very least, the BoJ's move puts a bottom under the (stock) market and over the next few weeks should give some significant upside," he said.

The yen proved less of a beneficiary, renewing its slide on the foreign exchange markets to dip through 123 against the dollar.

The weak yen was exerting upward pressure on prices by driving up import costs, the Bank of Japan report said.

"However, given the pausing economy as well as the heightening excessiveness of inventories... the balance between supply and demand in the domestic market is likely to exert downward pressures on prices," it said. http://asia.dailynews.yahoo.com/headlines/business/afp/article.html?s=asia/headlines/010321/business/afp/Bank_of_Japan_warns_recovery_has_stopped.html

-- Carl Jenkins (somewherepress@aol.com), March 21, 2001


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