Business World

Bank of Japan Governor Masaaki Shirakawa said the economy will keep expanding, playing down concern that it may fall into a recession.

“Economic growth will probably keep decelerating for the time being, but return to a moderate expansionary path thereafter,'' Shirakawa said in a speech at the central bank's quarterly branch managers meeting in Tokyo today.

Higher oil and raw-materials costs are slowing global growth and crimping corporate profits, and some economists say Japan is headed for its first recession since 2001. The bank may say next week that the world's second-largest economy is slowing more than it had forecast in April, after confidence among large manufacturers fell to a four-year low.

A recession is “unavoidable'' because rising energy and commodity prices are eroding incomes, said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Securities in Tokyo.

Shirakawa reiterated that the central bank has no bias regarding the direction of its next policy move.

“The Bank of Japan is committed to implementing monetary policy flexibly by closely checking upside and downside risk factors,'' he said.

The bank in April shelved a policy of gradually raising interest rates. Economists predict Shirakawa and his colleagues will keep the benchmark rate at 0.5 percent this year.

Export Growth

Shirakawa said export growth and capital investment are slowing and companies' profits are decreasing because of rising commodity costs cash advance loans. He described consumer spending as “firm'' and industrial production as “flat.''

Global financial markets remain volatile, the governor said, adding that the U.S. economy is stagnating and the outlook is “uncertain.'' Inflation is accelerating worldwide because of the commodities boom, he said.

“Economic growth has been undershooting the bank's April outlook, while prices have been overshooting,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC in Tokyo. “It's too early to say whether Japan will slip into a recession or not.''

The central bank's Tankan business survey last week showed companies expect earnings to fall for the first time in seven years because of the increase in costs.

Japan's economy will probably expand 1.5 percent in the year ending March 2009 and 1.7 percent in the following year, the bank said in April. Consumer prices excluding fresh food will climb 1.1 percent this year and 1 percent next year, it said. The central bank will publish a review of the April outlook on July 15.

The bank will release its quarterly regional economic report, which is Japan's version of the Federal Reserve's beige book, at 2:30 p.m. Managers of the Osaka, Nagoya, Fukuoka and Sapporo branches will hold news conferences later today.

Source