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Japanese gov't warns of downside risks to economy

11-24-2011 16:25 BJT

TOKYO, Nov. 24 (Xinhua) -- The Japanese government on Thursday maintained its basic assessment of the current state of the economy, but noted that falling corporate profits and a possible deterioration of the employment situation could weigh on the economy in the short term.

"The Japanese economy is still picking up slowly, while difficulties continue to prevail due to the Great East Japan Earthquake," the Cabinet Office said in its monthly report on the economy.

The office pointed to possible downside risks from unfavorable exchange rates, the debt crisis in the eurozone as well as flooding in Thailand, but the government said that it expected the economy to continue to pick up.

"Concerning short-term prospects, reflecting supply chain reconstruction and the effects of policy measures, the Japanese economy is expected to continue to pick up," the cabinet office said.

"However, there are downside risks that could stem from several events, such as constraints of electric power supply, the consequences of the nuclear accident, further slowing down of less resilient overseas economies and volatile fluctuations in exchange rates and stock prices due to the Eurozone debt crisis, and the flood disaster in Thailand," the government said in its executive summary released Thursday.

Economy minister Motohisa Furukawa said at a briefing for the report that the eurozone debt crisis could, "potentially have a direct impact on the Japanese economy, including its financial system."

This is due to Japan's banks having the third largest exposure to Italian sovereign debt. The cabinet office said that Japanese banks hold abound 30.8 billion U.S. dollars, or 11 percent, of the 288 billion U.S. dollar Italian debt.

"Europe's problems could affect trade flows, stocks and currencies, which could then indirectly impact the Japanese economy. This is something we need to monitor in the future," the economy minister added.

Japan's economy expanded in the third quarter, but the government pointed to downside pressures on the domestic front and warned that though industrial production is improving slowly, corporate profits could be seen to have slumped and business investment leveling off.

The cabinet office said that smaller firms are circumspect about their immediate future and the employment situation remains harsh in the wake of the March disasters. Private consumption is also flat, the government indicated.

The cabinet office maintained that Japan continues to find itself in a state of deflation.

"Recent price developments indicate that the Japanese economy is in a mild deflationary phase," the office stated.

Editor:Wang Xiaomei |Source: Xinhua

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