BOJ Raises Economic View in Four of Nine Regions

By Mayumi Otsuma

Jan. 18 (Bloomberg) -- The Bank of Japan raised its economic assessment in four of the country’s nine regions as the nation recovers from its worst postwar recession.

“The economy had picked up in all regions, although regional differences in the pace and extent of the recovery remained,” the central bank said at a quarterly meeting of its branch managers in Tokyo today. “Many regions continued to point to the low level of economic activity.”

The report helps Bank of Japan policy makers assess developments in the economy ahead of a board meeting next week. Governor Masaaki Shirakawa told the regional chiefs that the bank will persist with its policy of keeping borrowing costs near zero to overcome deflation and sustain growth.

“The Bank of Japan’s assessment so far is that the economy will stay on a moderate recovery track and it wants to watch how things will develop,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute and a former BOJ official.

The yen fell on speculation Japan will keep interest rates low for longer than other economies. The currency slid as much as 0.3 percent and traded at 90.94 per dollar at 6:35 p.m. in Tokyo from 90.77 late Jan. 15 in New York. The Nikkei 225 Stock Average dropped 1.2 percent.

The report underscores how exporters have led the recovery. The upgrades were in Kanto-Koshinetsu, Tokai, Kinki and Kyushu- Okinawa -- regions where many of Japan’s biggest manufacturers are based. The bank kept its view unchanged in the remaining five areas -- Hokkaido, Tohoku, Hokuriku, Chugoku and Shikoku.

Production Rebound

All nine locations reported increases in industrial production as well as higher sales of cars and home appliances, thanks to government incentives to buy the products.

Even so, seven areas said consumer spending as a whole remained weak. All nine reported a “severe” labor market and said capital spending was either falling or at low levels because corporate profits were deteriorating.

Gross domestic product in Japan is forecast to expand 1.4 percent in 2010 after a projected 5.3 percent contraction last year, according to the median estimate of economists surveyed by Bloomberg News.

Shirakawa said the central bank expects the pace of the recovery will remain moderate and exports and production will probably slow as global fiscal stimulus wanes.

“Japan’s economy is picking up, although there isn’t yet sufficient momentum to support a self-sustaining recovery in domestic private demand,” he told the branch managers.

Looking Abroad

Hideo Hayakawa, the Osaka branch chief, said larger companies in the region were looking abroad for business, while smaller firms and service providers “will continue to struggle” to attract customers at home.

“Companies doing business worldwide are giving up on the domestic market,” he told reporters. “That may indicate Japan’s employment and domestic demand will continue to languish even if exports and output increase.”

Osaka is home to electronics companies including Panasonic Corp. and Sharp Corp.

Hayakawa said government subsidies to encourage firms to retain workers have helped to stem job losses. Even so, “companies won’t move to hire new workers even if production rebounds. They’ll just try to handle increased orders with overtime and by reallocating workers in-house.”

Japan’s jobless rate unexpectedly rose to 5.2 percent in November, the first increase after it hit a record 5.7 percent in July, adding to signs that employment growth may not be strong enough to support the recovery.

Regional Unemployment

The unemployment rate was 6.3 percent in Aomori, northern Japan, and 7.3 percent in the southern island chain of Okinawa in the third quarter compared with Tokyo’s 5.2 percent, according to government data.

The job outlook is damping consumer spending in rural areas. Marui-Imai, a retailer based in Hokkaido, northern Japan, filed for bankruptcy protection last year and this week plans to close its Muroran City unit, the only department store in a town that used to flourish on the steel industry.

Mitsukoshi Ltd., which is owned by Isetan Mitsukoshi Holdings Ltd., Japan’s largest department store chain, in May closed its branch in Kagoshima, southern Japan.

Finance Minister Naoto Kan said today that the risk of a return to recession remains and the government will attempt to pass its record 92.3 trillion yen ($1 trillion) budget proposal as quickly as possible at a Diet session that convenes today.

Kan, who took the position this month, has indicted he wants the central bank to do more to bolster prices and support the economy.

The central bank has kept the benchmark interest rate at 0.1 percent since December 2008. It unveiled a 10 trillion yen lending program last month, a move Kan praised as helping to weaken the yen from a 14-year high against the dollar.

Companies who rely on public works spending are concerned about demand waning as the government cuts back on building roads and bridges, according to Tadashi Uhira, head of the BOJ’s Sapporo branch on the nation’s northernmost island. Prime Minister Yukio Hatoyama plans to slash public works expenditure by 18 percent in the year starting April 1.

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