TOKYO (Reuters) - Japan's economy will not fall into recession despite a likely slowdown in the first half of this fiscal year, partly because of firm growth abroad, the Bank of Japan said in the full text of its twice-yearly outlook report released on Thursday.
Still, the central bank warned of downside risks to the world's No. 2 economy, including uncertainty over fragile financial markets and rising energy prices.
In the core part of the outlook report on the economy and prices, the BOJ on Wednesday dropped its mantra of gradually "adjusting" Japan's low rates towards more normal levels for the first time in two years -- a sign that it gave up a bias towards raising rates.
BOJ Governor Masaaki Shirakawa also said the BOJ was putting more emphasis on downside risks than on upside risks in the outlook for the fiscal year that started on April 1.
The central bank now expects real gross domestic product for the year to register around 1.5 percent growth, revised down from a previous forecast of 2.1 percent.
"Although the deceleration in the pace of growth may continue through the first half of fiscal 2008/09, Japan's economy will not fall into open recession and will thereafter follow a path of moderate growth at around the potential growth rate," the full text of the report said.
The central bank added that the basic thinking behind the projection was based on relatively high growth in overseas economies; accommodative financial conditions; and minimal adjustment pressure on firms with regards to inventories, production capacity and employment.
The BOJ estimates Japan's potential growth rate to be around 1.5 percent or somewhat higher.
The report noted, however, that if production-related data does not show increased momentum in the near future, it could be judged that the nation's expansionary cycle -- the longest in the post-war era -- has already ended even though the economy remains basically firm.
In Japan, the government's business cycle-dating panel comprising academics and economists decides when Japan's economic cycles hit peaks and bottoms, but the panel announces its decisions several months after the fact.
The current expansionary cycle started in early 2002.
The full text of the BOJ report, which gives more details of the central bank's view on the economy, said the pace of growth in Japan's exports would become moderate in the first half of fiscal 2008/09 due to slower global economic growth and the impact of the recent strengthening in the yen.
But it added that exports would keep rising thanks to growth in emerging economies and countries that export natural resources.
The BOJ said the increase in exports to such countries, as well as the rise in profits of Japanese firms from overseas corporate activity, have so far been higher than the increase in the outflow of income from Japan to overseas economies caused by a worsening in the terms of trade.
If global economic growth were to continue, Japan's exports to a wide range of economies would remain on a rising trend and support the economy, the report said.
But it also warned that if downside risks were to materialize, exports and capital spending would become weaker than expected and it would become difficult for Japan's economy to grow above its potential rate.
To view the full text of the report, see the BOJ's website at: http://www.boj.or.jp/en/type/release/teiki/tenbo/gor0804b.pdf
(Reporting by Yoko Nishikawa; Editing by Chris Gallagher)
