Japan economic outlook downgraded

The central bank says exports are now recovering

Japan's central bank has downgraded its economic forecast for the current financial year, but has reiterated that the worst of the recession is over.

The Bank of Japan now expects the economy to shrink 3.4% in the 12 months to 31 March 2010, a deeper contraction than its previous forecast of -3.1%.

However, in a statement the central bank said that "Japan's economic conditions have stopped worsening".

It said both industrial production and exports were now starting to improve.

It also said it would continue efforts to improve lending to firms, such as buying corporate bonds from commercial banks, for another three months.

Comments 'correct'

Despite continuing weakness in consumer spending, the bank expects the Japanese economy to start to recover in the second half of this year.

Japan's economy contracted at an annual rate of 14.2% between January and March, its sharpest decline on record. Figures have yet to be released for the April to June quarter.

However, recent official data showed that the country's industrial output rose by 5.7% in May, compared with April.

Analysts broadly welcomed the Bank of Japan's comments.

"They are definitely correct when they say the economy overall has stopped worsening," said Nikhilesh Bhattacharyya of Moody's Economy.

"Industrial production grew probably at a record pace in the second quarter, based on April and May it looks like that."