Japan Says Economy `Deteriorating' as Indicator Dives (Update1)

By Keiko Ujikane and Jason Clenfield

Oct. 7 (Bloomberg) -- Japan's government said for a third month that the world's second-largest economy is ``deteriorating'' after an indicator of current conditions fell the most ever.

The coincident index slid to 100.7 in August from 103.5 in July, the Cabinet Office said today in Tokyo. The 2.8 point drop was the biggest since the gauge was first compiled in 1980.

The word ``deterioration'' signals ``the chance of a recession is high,'' the government said, acknowledging the country may have slipped into the first downturn in six years. Crude oil's 38 percent decline since reaching a record in July probably won't be enough to spur Japan's economy as the U.S. financial crisis saps growth in the country's export markets.


``We think the economy has entered a recessionary phase'' since the first quarter, said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. ``The recent pullback in energy prices is a positive development, but we see increasing downside risks to our scenario, given feedback from the financial markets to the real economy.''

The three-month moving-average of the index, which the government uses to make its monthly assessment, fell to 102.2 in August from 103.2 in July, today's report showed.

The Bank of Japan today acknowledged that a recovery in the world's second-largest economy may be delayed, saying there are ``substantial uncertainties'' about the outlook.

``Economic growth has been sluggish and these conditions may persist for some time given that the slowdown in overseas economies is becoming clearer,'' the bank said today after leaving the benchmark rate at 0.5 percent in a unanimous vote. It said the economy will pick up ``in the longer run.''

Japan's largest manufacturers turned pessimistic for the first time since 2003 and factory output fell at the fastest pace in at least five years in August, reports showed in the past month.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

Last Updated: October 7, 2008 01:42 EDT