Bank of Japan Says Recession Easing in All 9 Regions

By Mayumi Otsuma

July 6 (Bloomberg) -- The Bank of Japan became more optimistic about the economy in all nine regions for the first time since January 2006 and Governor Masaaki Shirakawa said exports and industrial production are recovering.

“The pace of economic deterioration was slower in all regions,” the central bank said in a quarterly report in Tokyo today. “Most regions, however, emphasized that their economies continued to be in a severe situation.”

Japan’s deepest postwar recession is abating, a government index of economic health showed today, yet central bank officials aren’t confident the rebound will be sustained. Shirakawa told the regional managers that while the economy will “show clearer evidence of leveling out over time,” businesses and households are likely to trim spending.

“Production may slow later this year and companies will probably continue to cut jobs and investment,” said Mari Iwashita, chief market economist at Daiwa SMBC Securities Co. in Tokyo. “The economy may resume falling after a temporary rebound, following a W-shaped path.”

Production is picking up because makers of cars, chemicals and electronic parts are shipping more products abroad to replenish inventories, the central bank said in today’s report. Output continues to slump at general machinery makers because companies are trimming investment.

Tankan Survey

The Bank of Japan’s Tankan business confidence survey last week showed companies plan to spend less on factories and equipment in the year ending March 31.

Toyota Motor Corp., which forecasts a second straight loss this year, plans to reduce spending 36 percent and cut pay for factory workers by 15 percent. Hitachi Construction Machinery Co. last month said the world market for digging equipment will contract by more than a third in the first half of the business year and rebound only 6 percent in the second half.

Companies in Osaka say exports and production started to turn around “earlier and stronger than expected,” according to Hideo Hayakawa, head of the central bank’s branch in the area, Japan’s second-largest metropolis and home to Sharp Corp. and Panasonic Corp.

Even so, “business managers are still unconfident about how the situation will develop after autumn,” Hayakawa said at a news briefing in Tokyo. “We can’t be optimistic about the outlook for domestic demand.”

Car Sales

In Nagoya, where Toyota is based, tax incentives for energy-efficient vehicles boosted sales “far beyond expectations,” said Junichi Maeda, head of the local branch. Maeda added that makers “aren’t overly optimistic about the outlook” because the measures will expire next March and sales of vehicles excluded from the program continue to stagnate.

Consumer spending remains “weak in all regions, reflecting the severe employment and income situation,” the central bank said. Japan’s unemployment rate climbed to a five- year high of 5.2 percent in May and job prospects slumped to an all-time low.

The coincident index climbed to 86.9 in May from 86 in April, the Cabinet Office said today in Tokyo. It was the second straight increase in the gauge, which comprises 11 indicators including factory production and retail sales.

Since lowering the overnight lending rate to 0.1 percent in December, the central bank has been buying commercial paper and corporate bonds from lenders in unprecedented steps to funnel cash to businesses. It has also offered to lend to commercial banks limitlessly in exchange for sufficient collateral. The programs expire on Sept. 30.

‘High Downside Risks’

Shirakawa said “high downside risks” to the economy remain and some companies are still struggling to borrow funds. Economists say the fragility of the rebound may prompt the central bank to extend the credit programs beyond September.

“Companies feel the economy is still in a severe state,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “It’s questionable whether the central bank would dare to take action that could fuel speculation about its existing policy.”

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net