The Japanese economy faces three years of deflation as it claws back from its worst slump in decades, the central bank warned yesterday, even as it moved to end some of its recession-busting measures.
The Bank of Japan (BOJ) painted a slightly more optimistic picture of the outlook for economic growth in a twice-yearly report, but warned that prices would keep falling until at least the year to March 2012.
“Japan’s economy has started to pick up, and in the second half of fiscal 2009 it is likely to improve gradually on the back of improvements in overseas economies as well as the effects of economic policy measures,” it said.
But the pace of recovery is likely to remain “moderate” until late next year because it will take time for the global economy to rebound and the effect of pump-priming stimulus measures will wane, it added.
The world’s second-largest economy is set to shrink 3.2 percent in the current financial year to March before rebounding by 1.2 percent next fiscal year and 2.1 percent the following year, the Bank of Japan predicted.
Consumer prices are expected to fall 1.5 percent in the current financial year, followed by a further decline of 0.8 percent next fiscal year and 0.4 percent the following year, the BOJ said.
The BOJ said it was a “critical issue” whether the decline in prices results in a deflationary spiral that depresses economic activity.
But with the pace of deflation expected to gradually slow, that appears unlikely to happen, it added.
Earlier in the day the central bank announced that it would end some of its emergency measures to fight the financial crisis at the end of the year as Asia’s biggest economy emerges from a deep recession.
The BOJ has been tackling the credit crunch with super-low lending rates and other steps to support struggling companies, such as purchases of corporate debt, which will finish at the end of December.
Core consumer prices have now fallen year-on-year for the past seven months, although the pace of decline eased to 2.3 percent last month, after a record 2.4 percent slump in August, the government reported yesterday.
Meanwhile, the unemployment rate fell to 5.3 percent last month, the government reported yesterday, beating market expectations for an increase to 5.6 percent.
A separate survey released by the labor ministry yesterday showed there were 43 job offers for every 100 jobseekers last month, slightly up from a record low of 42 in the previous two months.
It is the first time since May 2007 that the job-offer ratio has improved from the previous month.
Household spending also gained 1 percent last month from a year earlier, increasing for a second consecutive month.
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