Japan cuts growth outlook as yen, disasters weigh

Tokyo said it expects Asia's second-largest economy to grow a real 2.2 per cent in fiscal 2012, downgrading its previous forecast, released in August, for expansion of between 2.7 per cent and 2.9 per cent.

Asia's number two economy will contract 0.1 per cent in the year to March, the government said, a turnaround from the 0.5 per cent expansion tipped in August.

It added that "economic activities were seriously damaged" by the March 11 earthquake and tsunami that -- as well as killing thousands of people -- smashed supply lines and shuttered factories.

Tokyo said activity picked up after the supply chain was rebuilt, "but after summer, the recovery has slowed due to a quickly rising yen and the global economic slowdown brought about by the European sovereign debt crisis."

Japanese firms, especially exporters, have been hit hard by the strong yen, which is sitting near post-war record highs against the dollar due to its safe-have status at times of global economic uncertainty.

Growth prospects were dealt a further blow as the floods in Thailand either damaged or led to the closure of several factories owned by big Japanese firms, who were only just recovering from the March 11 disasters.

Government officials said they expect consumer prices to remain stable, projecting them to rise 0.1 per cent in 2012, adding to the woes of companies that have long grappled with the damaging effects of deflation.

The reading represents a faint hope and a reversal from a 0.2 per cent fall in the consumer price index expected during fiscal 2011.

Industrial output will grow 6.1 per cent, the report said, as domestic demand ramps up and a full recovery gets under way, a marked reversal of fortunes after a 1.9 per cent fall in factory production to March 2012.

The government also said the jobless rate will gradually fall from 5.0 per cent in fiscal 2010 to 4.5 per cent in fiscal 2011 and 4.3 per cent in the next 12 months.

Thursday's outlook comes a day after the Bank of Japan said the economic recovery "has paused" because of the slowing global economy and strong yen, while data revealed a growing trade deficit for the export-dependent nation.

"The pick-up in Japan's economic activity has paused, mainly due to the effects of a slowdown in overseas economies and of the appreciation of the yen," the central bank said after a two-day policy meeting.

It warned the European financial crisis was posing a serious risk to the global outlook.

"The sovereign debt problem in Europe could result in weaker growth not only in the European economy but also in the global economy, particularly through its effects on global financial markets," it said.

Underlining the difficulties facing Japan's export sector, figures Wednesday showed a trade deficit for a second straight month in November, with shipments to the crucial European market hit as the region struggles with a debt crisis.