The Bank of Japan (BOJ) downgraded its assessment of the Japanese economy today because of a big drop in output, only days after its controversial decision not to ease its monetary policy further.
The BOJ said in its monthly report for June that the slowdown in Japan's economy was intensifying and was likely to continue in the near term.
The report comes on the heels of the central bank's decision last Friday to keep monetary policy on hold despite data showing Japan's output shrank in the first three months of the year and a government report that said the economy was deteriorating.
"Looking at our economy, the adjustment phase is intensifying as output has fallen dramatically due mainly to a drop in exports," the BOJ report said.
In its previous two monthly reports, the central bank had merely described the economy as being in an adjustment phase; however, the latest downgrade still falls short of the blunt term deteriorating now being used by the government and that the BOJ itself used during the global financial crisis in 1998.
The downgrade is likely to fuel calls for a further monetary easing, perhaps at the BOJ's next Policy Board meeting later this month, as data continue to paint a bleak picture of the economy.
It said capital spending had turned downward and industrial output was falling sharply, due in part to concerns over an inventory buildup. Exports, meanwhile, continued to slump amid a global economic slowdown and moribund demand for information technology products worldwide.
Furthermore, the central bank said commercial banks were taking a somewhat tougher stance on lending to smaller firms, reflecting their risk-averse attitude.
The BOJ said exports could pick up and support the Japanese economy if the United States recovered later this year as is widely expected, driving global growth back on track. However, it added that a protracted global slowdown could exacerbate Japan's economic stagnation.