Japan Cuts Growth Forecast, Sees Recovery in 08/09

Japan's economy will grow 2.0 percent in the fiscal year starting on April 1, the government said on Wednesday while sharply downgrading its initial forecasts for the current year to reflect tumbling investment in housing.

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The annual growth projections came as the Bank of Japan kicks off its two-day policy review later in the day, at which the central bank is expected to keep interest rates on hold at 0.5 percent.

The finance ministry is expected to use the economic projections to draw up a draft budget totalling around 83.06 trillion yen ($733.3 billion) for the next fiscal year.

"With the global economy recovering in fiscal 2008/09, the corporate sector will remain firm and households will show improvement gradually," the government said in the projections. "A private-demand-led economic recovery is expected through
joint efforts by the government and the Bank of Japan."

The estimate of 2.0 percent growth underlines the sort of gradual expansion that the BOJ expects to lay the groundwork for an eventual rate rise, which most analysts now see in the second half of 2008.

Still, the estimate for the next fiscal year is lower than an earlier forecast of 2.2 percent.

The government sharply downgraded its view of the current fiscal year's growth to 1.3 percent from an earlier 2.1 percent.

The projections were largely in line with a Reuters poll of 46 economists, which showed growth expected to pick up to 1.9 percent in fiscal 2008/09 from 1.4 percent in the current fiscal year.

The government said it cut the 2007/08 forecast because of a construction slump following tighter building rules adopted in June. They slump was unrelated to the U.S. housing downturn.

But it expected economic growth to recover to around its potential rate in fiscal 2008/09.

Housing investment is expected to plunge 12.7 percent in the current fiscal year, then rebound to a 9.0 percent rise in fiscal 2008/09.

But the Japanese economy could also face risks, such as a more pronounced slowdown in the United States due to lingering subprime problems, a further rise in crude oil prices and a delayed recovery in housing starts.

"If these risk factors become evident, the growth could undershoot our current forecasts," Economics Minister Hiroko Ota told a news conference.

Growing Cautious

A survey showed small and mid-sized companies are growing cautious about Japan's economic outlook.

The index on their business outlook compiled by the government-affiliated Japan Finance Corporation for Small and Medium Enterprise fell for the first time in three years, as rising raw material and fuel costs were seen hurting profits.

The government's latest projections saw prices rising only slightly in the next fiscal year, a trend that will make it even harder for the BOJ to justify a rate hike in the near

The BOJ wants to gradually raise rates to avoid economic overheating, but it has kept rates unchanged since February amid tepid inflation and recent turmoil in world markets.

The government expects the overall consumer price index to rise 0.3 percent in fiscal 2008/09, picking up only modestly from a projected 0.2 percent in the current fiscal year.

The GDP deflator, one of the broadest measures of price trends that is used to derive real GDP from nominal GDP by adjusting for price changes, is seen at plus 0.1 percent in fiscal 2008/09.

That would be the first rise since the fiscal 1997/98, when it rose 1.0 percent. For the current fiscal year, the GDP deflator is forecast at minus 0.5 percent.

Private consumption, which accounts for more than half of economic activity, is seen rising 1.3 percent in fiscal 2008/09, while corporate capital spending is expected to rise 3.3 percent, compared with a 0.9 percent rise estimated for the current year.

The official growth forecast, drafted by the Cabinet Office, provides the basis for the government's budget plan as it is used to estimate tax revenue.