Japan Upgrades Outlook on Recovery

TOKYO —  Japan upgraded its assessment of its economy Monday, saying strong exports are bolstering output and capital spending and beginning to filter through to chronically weak consumption.

But the yen’s recent strength could be a threat to business conditions and warranted close attention, and overcoming deflation remains the top priority, the government said.

“The economy is recovering steadily, supported by business investment and exports,” the Cabinet office said in its monthly report, an upgrade from the previous report, which had cited only an “incipient recovery.”

The upgrade comes after a series of healthy economic data showing businesses have entered an expansionary cycle, and the new wording highlights the government’s confidence that the recovery will be sustained.

The government forecasts economic growth of about 2% in the fiscal year ending March 31 and about 1.8% the next year.

Backing up the optimism were figures Monday from research firm Teikoku Databank showing the number of corporate bankruptcies fell in 2003 for the first time in four years.

The Cabinet office also said employment conditions were improving and personal spending, which accounts for more than 55% of all economic activity, was showing signs of a pickup.

The Cabinet office report echoed comments to a new session of parliament by Prime Minister Junichiro Koizumi, who said the economy was recovering thanks to structural reforms.

But problems remain, a major one being falling prices, Economics and Fiscal Policy Minister Heizo Takenaka said.

“Deflation remains as one of the most important problems,” Takenaka said. “There must be conditions for growth in the money supply, and the government and the Bank of Japan must cooperate on this.” The Bank of Japan, however, is expected to maintain its ultra-loose monetary policy.

Another worry for Japanese officials is the effect of a strong yen on exports, the main engine of the recovery.

Finance Minister Sadakazu Tanigaki delivered a fresh warning against the yen’s rise in parliament Monday, saying that the government would keep intervening if it saw the need.