Bank of Japan Set to Downgrade View on Economy

The Bank of Japan will likely cut its forecasts for the economy in a half-yearly outlook report at the end of April, minutes showed some board members saying at a policy meeting last month, underscoring its concern about the nation's deepening recession.

Japan is mired in its worst recession since World War Two as tumbling exports hit companies, with the pain spreading to households in the form of rising unemployment.

"Many members said downside risks to the economy warranted careful attention for the time being as economic conditions had become increasingly severe and the effect of the worsening job and income situation on economic activity might increase," minutes of the March 17-18 meeting showed on Friday.

At the meeting, the BOJ increased its purchases of government bonds by nearly a third in a move seen as capping long-term yields and making it cheaper for the government to borrow.

On April 7 the central bank added more types of assets it will accept as collateral to ease corporate credit strains, but kept interest rates steady at 0.1 percent.

BOJ Governor Masaaki Shirakawa had suggested a cut in the bank's growth projection, saying after this week's meeting that the outlook was darkening even more than in the dire forecasts made by the central bank less than three months ago.

The BOJ releases a twice-yearly economic and price outlook report every April and October. It reviews the forecasts in January and July.

In the January review, the central bank said the economy would contract 2.0 percent in the current fiscal year to March 2010. That is far more optimistic than the view of analysts polled by Reuters, who expect the economy to shrink 4.5 percent this fiscal year.

The credit crunch has hit the corporate finance market hard, forcing many companies to turn to their bankers for finance, and March figures issued on Friday showed a 3.4 percent rise in bank loans from a year earlier.

That was only slightly less than the record 3.6 percent rise in January from a year earlier.

Japanese bank lending has been growing at a record pace in recent months as companies hoard cash while the credit crisis makes financing through capital markets difficult.

Although a series of measures the BOJ has taken in recent months, such as buying commercial paper and corporate bonds, have helped to ease some of the blockage in corporate finance, credit spreads on corporate bonds remain high.

The BOJ's tankan corporate survey showed the highest percentage of companies are feeling their funding conditions are difficult since the Japanese banking crisis in late 1990s.

In the coming weeks many companies, suffering from evaporating exports, are expected to report dismal earnings results for the year that ended on March 31.

That could prompt banks to become more cautious about lending, hurting the already shaky conditions for corporate finance, some analysts worry.

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Japan's ruling party unveiled on Thursday a record $154 billion stimulus plan, around 3 percent of GDP, to repair some of the damage caused by the recession. The government will formally announce the package on Friday.

The economy shrank 3.1 percent in October-December and is expected to have shrunk a further 2.5 percent in January-March.

The contraction is bigger than in other major economies, despite Japan's banking system being among the least damaged by the credit crisis, because of the country's reliance on exports of cars and electronics.

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