Japan's government downgraded its view of the economy for the third straight month in October as worries about Europe's debt crisis and China's slowdown intensified, adding pressure on the central bank to offer further stimulus to support growth.
It was the longest streak of downgrades since five straight months of cuts made just after the collapse of Lehman Brothers in 2008, underscoring Tokyo's growing alarm that the prolonged overseas slowdown may again nudge Japan into recession.
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Economics Minister Seiji Maehara said that while it was too early to judge whether Japan may slip into recession, the economy's trend was weak as weak global demand hurt exports.
"A further slowdown in global growth and volatility in financial markets may hurt Japan's economy, which are risks we must be vigilant to," Maehara told a news conference on Friday.
The downgrade in assessment followed the Bank of Japan's warning last week that economic activity was leveling off and may not recover until well into next year.
"The economic recovery has had a weak tone recently due to a slowdown in the global economy, although some steadiness is still seen," the government said in its latest monthly report released on Friday.
Slackening overseas demand and weak exports also prompted the government to lower its assessment on factory output and corporate sentiment.
PRESSURE ON BOJ
Japan's economy has so far outperformed most of its peers in the Group of Seven helped by spending on reconstruction from last year's earthquake and tsunami. But weak external demand and a strong yen have led analysts to project growth will likely stall for the rest of this year.
The International Monetary Fund also trimmed its growth forecasts for Japan, as factory output fell to a 15-month low in August on sagging sales to top export market China and business sentiment worsened in the three months to September.
Adding to headaches for policymakers is the impact of a territorial dispute with China, which has sparked anti-Japan protests in China and calls for boycotts of Japanese goods.
"Trouble stemming from the (territorial dispute) is affecting businesses including the auto sector, which would also impact other related industries such as materials and iron and steel," said Minoru Masujima, director of macroeconomic analysis at the Cabinet Office, which is charged with compiling the monthly report.
The government's bleak assessment adds pressure on the Bank of Japan for action ahead of its rate review on October 30.
At the meeting, the central bank is set to cut its long-term growth forecasts and admit that it will take several more years for Japan to achieve its 1 percent inflation target, and bring to an end a long-running deflationary era.
The economics minister, a vocal advocate of more aggressive monetary easing, kept up calls for further BOJ action, saying that the central bank has a responsibility to achieve its price target at an early date.
"We will continue to call for powerful monetary easing by the BOJ," Maehara said.
(Editing by Simon Cameron-Moore)