Japan Raises Forecasts As Economy Recovers

Japan revised upward its monthly economic forecasts as production and exports recover from the downturn following the March earthquake and tsunami. But it warned that a slowdown in overseas economies may hamper Japan’s recovery.

The first upgrading in two months reflect progress in overcoming supply-chain disruptions that had been constraining industrial output by carmakers, tech firms and other export-driven companies.

“Industrial production is picking up as the reconstruction of supply chains has progressed,” said a report by the Cabinet. “Exports exhibit signs of picking up.

“It is not simply the relaxation of shocks caused by the natural disaster,” said a ministry official. “We have confirmed the sustainability of the recovery trend.”

The report also raised forecasts for private consumption and home construction but left unchanged its view of other components. Business investment is reported to be “leveling off” after weakening due to the disaster. The employment situation “experiences a pause in improvement and remains severe.” Prices continue to suggest the economy “is in a mild deflationary phase.”

The report forecasts that the economy will continue to pick up while facing “downside risks” due to the recent spike in yen and plunging stock prices. The stronger yen could accelerate the shift of production abroad, said economic and fiscal policy minister Kaoru Yosano. He is recommending that government pursue the planned corporate tax cut and give companies incentives to keep operations in Japan.

The government was expected to postpone the tax cut plans to help secure funds for reconstruction work after the earthquake and tsunami.

The report also warned of a further slowing of overseas economies, calling the U.S. recovery “extremely weak”. The report suggested another downward revision in two months in light of weak U.S. consumer spending and the adverse impact on economic growth of the recent congressional deal to cut deficits over 10 years and increase the debt ceiling. All this could hurt Japanese exports to the U.S., said the Cabinet report.

The report maintained its evaluations on China and India while downgrading other Asian economies like Taiwan and Singapore in light of their slowing production.

It maintained the assessment of Europe but warned of stresses in the financial system due to the sovereign debt crisis in some EU economies.