Shirakawa Expects ‘Only Moderate’ Recovery in Japan

By Mayumi Otsuma

Aug. 31 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa said the economic recovery is likely to be “only moderate” as demand at home and abroad remains sluggish and prices keep falling.

“It is hard to assume a marked and rapid recovery in exports,” Shirakawa said in a speech today in Osaka, the country’s second-largest metropolitan area. Spending by the nation’s companies and consumers is “likely to remain relatively weak for the time being.”

The governor spoke a day after the Democratic Party of Japan won power for the first time on a pledge to revive an economy that’s struggling to emerge from its worst postwar recession. Shirakawa, who became governor in April last year after the DPJ rejected the government’s first two choices, will avoid rushing to raise interest rates from 0.1 percent amid record unemployment and deflation, economists say.

“The Bank of Japan will probably have to maintain the policy status quo at least until 2011, given that economic growth will continue to stagnate and the jobless rate will stay pretty high,” said Naoki Iizuka, a senior economist at Mizuho Securities Co. in Tokyo.

Shirakawa, 59, said policy makers will focus on the risk that prices and the economy may fail to meet their expectations. It will take “considerable” time before prices return to a “desirable level,” he said, while adding that the risk of a deflationary spiral hasn’t risen.

Recovery in Danger

The world’s second-largest economy grew for the first time in more than a year last quarter, expanding at an annual 3.7 percent pace as more than $2 trillion in worldwide stimulus spurred exports. The recovery may already be in danger: the jobless rate rose to a record 5.7 percent in July and reports today showed factory output growth slowed and retail sales and wages fell.

“The question is how the economy will develop after positive effects fade,” Shirakawa said at the forum. “We still cannot be confident about the strength of final demand at home.”

Supply exceeded demand by 7.4 percent in the three months ended June, close to the previous quarter’s record 8 percent, the Cabinet Office said today. Consumer prices excluding fresh food fell a record 2.2 percent in July from a year earlier, threatening to erode corporate profits.

“We believe the nationwide core CPI will remain in negative territory over the next few years,” said Junko Nishioka, a senior economist at RBS Securities in Tokyo. “The Bank of Japan may find it difficult to normalize its monetary policy” and will probably keep low rates low until core prices turn positive, she said.

Since the central bank cut the key rate to 0.1 percent in December, it has been buying corporate debt from lenders and offering them unlimited loans backed by collateral to channel funds to companies. The policy board last month extended the steps by three months to Dec. 31.

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