Japan’s Government, Central Bank Agree Worst of Recession Over

June 18 (Bloomberg) -- Japan’s government and central bank agree that the worst of the deepest postwar recession is over.

Demand is picking up even though “the economy is in a difficult situation,” the Cabinet Office said in Tokyo yesterday. The Bank of Japan said the world’s second-largest economy has “begun to stop worsening.”

Evidence the economy has turned a corner has mounted as companies bolstered industrial output at the fastest pace in 56 years in April and exports recovered from unprecedented declines. Central bank Governor Masaaki Shirakawa said this week he is “cautious” about the rebound because renewed demand may only be temporary.

“Policy makers are raising their economic assessments to reflect recent improvements, but they remain pretty cautious about the outlook,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “Exports are starting to turn around, but that doesn’t guarantee production will keep rebounding and support employment.”

The Nikkei 225 Stock Average rose above 10,000 for the first time in eight months last week and consumer sentiment climbed to a 14-month high in May. Stocks have retreated 2.9 percent this week and the yen has strengthened against the dollar on concern a recovery in the U.S., Japan’s largest export market, isn’t a sure thing.

“It seems clear the economy bottomed out between January and March,” Japan’s Finance Minister Kaoru Yosano told reporters at a press briefing yesterday. “There are signs the decline in personal spending on some items is ending.”

‘Engines Turn’

It may take some time before Americans start spending again. President Barack Obama said in an interview that unemployment may climb to 10 percent from the current 25-year high of 9.4 percent.

“You’re starting to see the engines of the economy turn,” Obama said. Still, he added that “it’s going to take a long time” for a full-fledged recovery as households work off the debt accumulated during the real-estate boom.

Japan’s export dependence has caused it to suffer the most from the global recession. Gross domestic product fell at an annual 14.2 percent pace in the three months ended March 31, the steepest contraction since records began half a century ago. Analysts surveyed by Bloomberg expect the economy to grow this quarter, which would be the first expansion in a year.

“The upgrades by the BOJ and the government just mean the worst is over,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “The U.S. recovery will be postponed until the middle of next year so it’ll be impossible for Japan to have a solid recovery.”

‘Delicate Stage’

Economists say the economy may stutter after recovering from its worst contraction on record as Prime Minister Taro Aso’s 25 trillion-yen ($260 billion) stimulus plans wear off. The government said in yesterday’s report that rising unemployment may also discourage consumer spending and damp growth in the coming months.

“The Japanese economy is still at a delicate stage,” said David Cohen, head of Asian forecasting at Action Economics in Singapore. “At the end of the day, much will remain dependent upon the outlook for global export demand.”

Optimism that the worst is over doesn’t mean the Bank of Japan is preparing to raise the key overnight lending rate, which has stayed at 0.1 percent since being cut in December.

“Given that employment and wages are deteriorating and deflation risk is rising, it’s difficult to expect a rate hike anytime soon,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The central bank won’t likely raise rates until fiscal 2011 at the earliest,” he said, referring to the year ending March 2012.

Job Shortage

Deteriorating prospects for consumers are also a risk, the Cabinet Office said in yesterday’s report. The unemployment rate rose to a five-year high of 5 percent in April and economists surveyed by Bloomberg expect it to climb to a record 5.8 percent next year. About two work seekers are competing for a single spot, the most severe job shortage on record.

“We aren’t in a recovery phase,” said Fumihira Nishizaki, director of macroeconomic analysis at the Cabinet Office. “There is a risk that Japan’s economy will deteriorate again.”