The Bank of Japan on Monday cut its assessment for most of the country's regional economies and warned of widening damage from last month's deadly earthquake as supply problems hobble the auto industry, a key engine of growth.
BOJ Governor Masaaki Shirakawa stuck to his view that while Japan's economy will face strong downward pressure over the near-term, it will eventually resume its recovery as exports rebound and supply constraints ease.
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The central bank's report on regional economies showed that the damage was being felt well beyond areas hit directly by the March 11 quake, including the Tokai central Japan region, home to auto giant Toyota Motor Corp .
"Cautious views about the economy have become widespread in many regions, mainly reflecting setbacks in production following the earthquake," the BOJ said in the quarterly report on the regional economy, issued after a meeting of BOJ branch managers.
The central bank cut its assessment for seven regional economies out of nine.
It said output fell chiefly in regions closely linked to car manufacturing, as the 9.0 magnitude quake damaged equipment, disrupted supply chains and cut off electricity.
Japan's top automakers planned to resume work at all domestic factories in stages starting on Monday, but output levels will be at half of original plans and depend on the availability of parts and power. [ID:nN08212730]
Sendai Bank, which is based in one of the quake-hit areas, said on Monday it may seek an injection of public funds to bolster its capital, becoming the first lender to signal that it may tap a government scheme to help banks hurt by the quake. [ID:nL3E7FB0WT]
The BOJ's regional report, similar to the U.S. Federal Reserve's Beige Book, showed that the northeast region had been damaged massively, with production and business facilities impaired.
The head of the BOJ's Osaka branch in western Japan offered a somewhat upbeat take on output for his region, which is home to several big electronics manufacturers, saying that conditions could improve in May or June.
"Many electronics firms have managed to continue production by making use of parts kept in stock," Osaka branch head Hideo Hayakawa told a news conference.
The assessments of the regional economy will be taken into account when the BOJ reviews its long-term economic forecasts, to be issued in its twice-yearly outlook report on April 28.
The BOJ is seen sharply cutting its growth forecast for the fiscal year that began in April, although the dominant view within the bank is that the economy will narrowly escape a contraction for the year.
The central bank is expected to project a rebound in economic growth in the next fiscal year to March 2013, according to sources familiar with the bank's thinking.
The BOJ last week launched an ultra-cheap loan scheme for banks in the area devastated by the quake, and has signalled its readiness to ease monetary policy further if damage from the quake threatens Japan's return to a moderate recovery.
In January, the BOJ projected Japan's economy would grow 1.6 percent in fiscal 2011/12 and expand 2.0 percent the following year. (Additional reporting by Leika Kihara; Editing by Edmund Klamann and Nathan Layne)