Japan downgrades economic outlook

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For the fourth successive month, the Japanese government has downgraded its outlook for the economy, which it says is "increasingly weakening".

"Exports have faltered, with the result that industrial production has started to fall," said the Cabinet Office in its May economic report.

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The news is a severe setback for Prime Minister Junichiro Koizumi who took office just weeks ago vowing to tackle the main causes of Japan's economic malaise.

Meanwhile, on Friday, the government also announced the creation of a new jobs taskforce to tackle the layoffs expected to result if banks go ahead with writing off bad debts.

"It is important to work on comprehensive policies to deal with promoting growth in new industries and new job opportunities," the Health, Labour and Welfare minister Chikara Sakaguchi said.

He mentioned that one possibility was to change labour regulations allowing employers to give short-term contracts of up to three years, rather than a year as at present.

'Weak production'

Declines in industrial production and high unemployment were the main factors behind the downgrade, the government said.

"We expect production to remain weak for some time," said Haruhito Arai, an economic counsellor at the Cabinet Office.

He also said that factories were experiencing a build-up in stocks of electrical parts, such as semiconductors, caused by the slump in the IT industry.

But he was keen to emphasise that the government did not think the economy was heading back into recession.

"The government is making efforts to prevent that," he said.

Downward spiral

The Organisation for Economic Co-operation & Development (OECD) has said that the Japanese economy, the world's second largest, will only grow by 1% this year, a sharp revision of its earlier prediction of 2.3% growth.

Japan's economy, struggling for years with bad loans, was "faltering and at risk of entering a downward spiral," it warned.

Heavily reliant on exports, Japan has been hit hard by economic slowdown in the US.