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Monday, 18 June, 2001, 06:48 GMT 07:48 UK
Japan's Bank depicts gloomy scenes
Japan's Prime Minister Junichiro Koizumi
Prime Minister Junichiro Koizumi is struggling to help the economy out of the doldrums
The Bank of Japan has downgraded its outlook of the economy.

The wording of the monthly report has been tweaked to make it clear that the outlook is now unmistakeably gloomy.

The bank highlighted a further weakening of corporate activity including production and investment, against the backdrop of growing uncertainty over the global economic outlook.

And the slowdown in the US economy has had a severe impact on Japanese exports.

"Adjustments in economic activities are gradually intensifying as production is declining substantially, reflecting a fall in exports," said the bank.

Impacting monetary policy

The economic downgrade is fuelling fears that the yen will fall further against the dollar on the back of an even weaker stance on monetary policy.

"The Japanese economic outlook is deteriorating, making it more likely that the Bank of Japan would ease monetary policy further," said Taisuke Tanaka, strategist at Credit Suisse First Boston.

Japanese politicians are again exerting pressure on the Bank of Japan to ease monetary policy but leading economists say such a policy is unlikely to work until deep structural and budgetary reforms are implemented.

Some analysts think that it is only a matter of time before the bank takes more drastic easing steps by increasing its provision of funds in the market.

At 1335 in Tokyo (0435 GMT), the dollar was trading at up to 122.97 yen, after hitting a four-week high of 123.25 yen on Friday.

Recession looms

Gross Domestic Product (GDP) figures released last week fell by 0.2% in real terms, fuelling fears that Japan is just a few months away from entering another recession.

Japan was last in recession at the end of 1999 when it showed signs of being strong enough to pull itself out of the cycle of 11 years of negative economic growth.

But since then, the global economic slowdown has sent Japan's economy spiralling back down.

The gloomy picture is making Prime Minister Junichiro Koizumi's goals for economic reform increasingly crucial, but increasingly difficult.

Tokyo's leading share index, the Nikkei, closed 93 points lower at 12,698.

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See also:

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