Gloomy outlook for Japan

Japanese consumer spending is slipping

The Bank of Japan has downgraded its assessment of Japan's faltering economy for a second month.

The move will fuel speculation that it will ease monetary policy in coming months after ignoring calls to do so last week.

The central bank said in its monthly report that economic adjustments - considered a euphemism for slowdown - had intensified.

The wording has been interpreted as a downgrade in its overall assessment.

The central bank is under increasing political pressure to share the burden of boosting the world's second-largest economy as it teeters on the brink of its fourth recession in less than 10 years.

Reform programme

The BOJ report said: "Adjustments in economic activity are intensifying as production falls sharply due to declines in exports."

It's a relatively minor downgrade, but they have probably come to the bottom of the range that the word adjustment can describe

Masaaki Kanno, chief economist, JP Morgan Securities

The central bank, which has already moved short-term interest rates close to zero after its unprecedented easing measures in March, is widely expected to have to ease credit again soon as the economy weakens.

Masaaki Kanno, chief economist at JP Morgan Securities said: "It's a relatively minor downgrade, but they have probably come to the bottom of the range that the word adjustment can describe.

"It's like a prelude to a major change, both in terms of monetary policy and the wording in their report."

The BOJ's policy board on Friday decided to keep monetary policy unchanged, dodging pressure from the government to do more to prevent Japan from falling into a deflationary spiral.

The bank is thought to be waiting to gauge progress in Prime Minister Junichiro Koizumi's reform programmes.

"We don't expect a move in August, but in September the BOJ's policy meeting will come on the heels of April-June gross domestic product data, which we expect to show an economic contraction again," Mr Kanno said.

A second quarter of contraction would place Japan in recession.

Personal consumption

Monday's report downgraded its assessment of personal consumption, which comprises about 60% of the economy, saying it remained flat overall.

It removed the phrase "some indicators were showing bright signs" for the first time since January's report.

In contrast, the government said last week that there were some signs consumption was bottoming out.

Data on Monday showed department store sales in the Tokyo area rose 3.8% in June from a year earlier.

The central bank also lowered its view on capital spending, corporate profits and business sentiment, reflecting the results of the BOJ's June "tankan" survey of corporate sentiment.