Bank of Japan cuts economic view

But it warned that slowing overseas growth,persistent yen strength and supply chain disruptions from the severe flooding in Thailand could weigh on Japan’s economy for the time being. Thailand is a major Southeast Asian manufacturing hub for many Japanese auto-related companies and electronics firms.

Japan’s economy continues to pick up but at a more moderate pace,mainly due to the effects of a slowdown in overseas economies,the central bank said in a statement issued after its policy review.

It also warned that Europe’s sovereign debt woes may hurt the global economy and sounded more cautious on exports and output,describing their growth as moderating.

In October,the BOJ said Japan’s economy continued to pick up with exports and output rising as a trend.

By downgrading its economic assessment,the BOJ indicated its vigilance to risks regarding overseas economies,chiefly uncertainty over Europe’s debt crisis and the effect of Thai floods,said Yuichi Kodama,an economist at Meiji Yasuda Life Insurance in Tokyo.

It’s hard to predict the timing of the next action as it solely depends on currency moves. But the BOJ may ease early next year when the effects of last month’s currency intervention and monetary easing will fade,he said.

YEN RISE KEEPS BOJ UNDER PRESSURE

BOJ Governor Masaaki Shirakawa,in his post-meeting news conference,will probably signal the bank’s readiness to ease policy again if Japan’s recovery prospects are threatened.

Japan was the best performer among major advanced economies in the third quarter,rebounding strongly from an earthquake-triggered recession. But growth is expected to stagnate for the rest of this year as the export-reliant economy begins to feel the pain from a stubbornly strong yen and slowing overseas demand.

The decision to stand pat on policy reflects the dominant view within the central bank that last month’s monetary easing has already taken into account a recent slump in factory output and business sentiment.

With rates near zero,policymakers also want to reserve the bank’s limited policy options in case Europe’s debt crisis escalates into a global shock similar to that sparked by the collapse of Lehman Brothers in 2008.

Still,the BOJ’s bleaker assessment of Japan’s economic performance underscores the growing sense of pessimism about the impact of the debt crisis in Europe on the world economy.

While board member Ryuzo Miyao did not repeat his proposal for a bigger stimulus,which was voted down last month,another member Seiji Nakamura has said risks to growth have heightened even after the monetary easing in October.

Policymakers hope fiscal spending for reconstruction from the March earthquake will help make up for cooling overseas demand,but some analysts say the effects will appear in full only around the spring of 2012.

That may be too late to mitigate the impact of a slowdown in Japan’s key export markets in Asia linked to weakening U.S. and European economies.

To the disappointment of Japanese authorities,the yen has also risen close to levels before Tokyo spent an estimated 7.7 trillion yen intervening in the currency market two weeks ago.

With no end in sight to the debt crisis in Europe,which is boosting safe-haven demand for the yen,the BOJ is likely to continue facing calls for bolder action to support the economy.

The central bank is ready to act on any signs of contagion from Europe’s debt crisis by injecting huge amounts of liquidity via market operations and loosening monetary policy,sources familiar with its thinking have said.

Any future easing will come via another increase in purchases of financial assets,predominantly government bonds.

The central bank cut its growth forecasts and eased policy on Oct. 27 by adding another 5 trillion yen ($65 billion) to its asset buying scheme,bringing it to 20 trillion yen. ($1 = 76.950 Japanese Yen)