Japan Economy in 'Lull'

TOKYO—The Japanese economy remains largely at a standstill, the government said Thursday, an acknowledgment that will likely increase pressure on Prime Minister Naoto Kan to do more to jump-start growth even as he seeks to cut the country's massive debt.

In its monthly report for November, the government said "the economy has recently entered a lull," using the same language it did in October when it cut its assessment for the first time in more than a year and a half.

Persistent yen strength has hurt the export-driven economy, while deflation continues to stifle growth at home. Factory output has been falling while personal consumption is showing "some weakness," the government said in cutting its assessment of these two important areas of the economy.

The downgrade to consumption was the first in nearly two years, underscoring concerns that spending could fall sharply as subsidies for fuel-efficient cars and other purchase-incentive programs expire.

The economic deterioration will likely lead to calls for the government to spend more on fiscal stimulus measures. An extra budget, including 4.85 trillion yen ($58.2 billion) to fund new stimulus, passed the powerful lower house of parliament earlier this week, essentially assuring its enactment. But analysts say the spending, which pales in comparison with previous economic support packages, may not be enough to stop the slowdown.

One hurdle Tokyo faces is public debt approaching twice the country's annual economic output, the highest ratio among rich countries. To keep its mountain of debt from growing, the government has pledged to cap its initial budget for the fiscal year starting in April at 71 trillion yen.

Such constraints on spending mean the government will likely ramp up pressure on the Bank of Japan to ease monetary policy further. The central bank last month cut its key policy interest rate to a 0.0%-0.1% range from 0.1%, and also launched a program to buy 5 trillion yen in assets including government bonds.

"Placing top priority on casting off deflation, the government will work as one with the Bank of Japan to launch vigorous and comprehensive policy efforts," the government said in its report.

In another negative sign, the government cut its view on imports, saying they are "moderating."

The soaring currency makes foreign goods cheaper for Japanese shoppers. Stores have been offering "strong-yen sales" on French cheeses, Italian suits, U.S. golf clubs and other overseas products. But import volumes have continued to decline as shoppers hesitate to spend much with the economic outlook so uncertain.

A slight improvement in the jobs market will likely be insufficient to spur more spending, as deflation prompts consumers to continue to wait for prices to fall, analysts say. Core consumer prices fell 1.1% on year in September for the 19th straight month.

And while the government raised its view on employment, after the jobless rate fell slightly to 5% in September from 5.1% in the previous month, it continued to say that the situation "remains severe."