TOKYO, Oct 10: Japan’s government kept up its grim view of the economy for the second straight month on Wednesday, seeing a continued deterioration and a risk of worse to come in the wake of the September 11, attacks in the United States.

The economic report for October is likely to add to growing doubts over the feasibility of Prime Minister Junichiro Koizumi’s pledge to press ahead with painful reforms, including a planned $250 billion cap on new issuance of government bonds this fiscal year.

The economy continues to deteriorate, the monthly report said, using the same phrasing as last month to describe the state of the world’s second-largest economy.

As for the short-term prospects, concerns have intensified with the adverse effects of the series of terrorist attacks in the United States on the world economy, it added.

The report lowered its assessment of corporate earnings and business sentiment after a closely watched survey by the central bank recently showed confidence deteriorating among big and small companies alike and firms lowering their earnings forecasts.

The Bank of Japan’s “tankan” short-term survey released last week produced a reading of minus 33 in the headline sentiment diffusion index for large manufacturers, down from minus 16 in June.

The government kept its view on personal consumption and labour conditions unchanged, while upgrading the assessment on housing construction, but only due to a rise in public housing start-ups in July and August.

Haruhito Arai, director of economic analysis at the Cabinet Office, said downgrades in two components did not warrant a downgrade in the overall assessment as economic conditions were still within the realm of a continued deterioration.

If you look at the content of the report, there are lots of weaker indicators but the word ‘deteriorate’ has some room to fit those in, he told a news conference.

Arai said economic indicators released so far had not shown the effects of the suicide attacks, but warned forthcoming data may point to more bad news for Japan’s export-driven economy.

We have to watch with caution the potential impact of the terrorist attacks and subsequent developments on the world economy, he said.

Arai added that Japan’s already weakening exports could be at risk given concerns over weakening personal spending in the United States, while consumer and corporate sentiment in Japan could also worsen.

Economics Minister Heizo Takenaka said the government would closely monitor the impact of the attacks on personal consumption in the United States when assessing the outlook for Japan’s economy.

The most important point (for Japan’s economy) is the trend in US consumption, he told a news conference after the release of the report.

Takenaka reiterated that Koizumi’s administration would bear crisis management in mind when conducting its economic measures but added there had been no discussion so far of a second extra budget to help the ailing economy.

The government is in the process of compiling a supplementary budget for this fiscal year but worries over the spillover from the attacks on New York and Washington and subsequent events have spurred speculation of additional fiscal spending.

Japan is on the verge of its fourth recession in a decade, with global economic uncertainty following the attacks and this week’s US-led retaliation in Afghanistan adding to its woes.

Growing uncertainty over the economic outlook will likely prompt Koizumi to bend somewhat on his reformist stand, although analysts say what is crucial is that he does not abandon his structural reform pledge altogether.

Koizumi reiterated on Tuesday he would be flexible on the size of an extra budget for the current fiscal year, adding that economic conditions have changed since he suggested a cap on government debt in April. —Reuters