Japan's economy is improving to levels seen before the March 11 Great East Japan Earthquake, but a number of factors, including turmoil overseas, could derail the recovery process, the Cabinet Office said.
"The Japanese economy is recovering, although it still faces challenging situations," according to the Cabinet Office's monthly economic report released Sept. 20.
Although the report, issued six months after the March 11 disaster, used the same "recovering" term as in the August report, the latest view stressed greater uncertainty of the future direction of the economy.
"Significant downside risks remain in the market, including a possible weakening of overseas economies, which have showed a slowdown in improvement, as well as sharp changes in the exchange rate," the September report said.
The report also revised downward its assessment of the overall economy compared with August for the second straight month.
Motohisa Furukawa, minister of economy and fiscal policy, emphasized that construction and other rebuilding-related services in the disaster-hit Tohoku region will provide a lift for the economy.
"We believe that Japan will highly likely see growing demand soon driven by the reconstruction efforts," he said at a Sept. 20 news conference.
However, such demand has not yet picked up steam, and the rising yen continues to be a problem for Japanese manufacturers and other companies that rely on exports.
In fact, current market conditions have put the brakes on certain aspects of the economy that had been rebounding since the quake.
The industrial output index had plummeted 15.5 percent in March compared with February due mainly to heavy damage to factories caused by the earthquake and tsunami and suspended production of plants near the crippled Fukushima No. 1 nuclear power station.
The index recovered to about 95 percent of pre-quake levels in June.
Consumer spending had increased on strong sales of televisions ahead of the nationwide shift to digital terrestrial transmission and air conditioners amid the scorching summer. But as sales of those two appliances settled, new vehicle sales became the main driving force propping up consumer spending.
But both industrial output and consumer spending flattened out in July.
"The recent V-shaped recovery led by the private sector has now ended, and the economy is likely to enter a transitional phase before the government's economic measures roll out," said Kyohei Morita, chief economist of Barclay Capital Japan Ltd.
The health of Japan's economy will affect the timing of a proposed hike in income taxes that the ruling Democratic Party of Japan plans to use to finance the rebuilding efforts in disaster areas.
Furukawa did not go into details on the timing of the tax raise.
"We will look into the impact of the expected tax increase on the economy when we decide how to share such additional burdens (among taxpayers) within the DPJ," Furukawa said.
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