The Bank of Japan, headed by Governor Masaaki Shirakawa, trimmed its outlook for fiscal 2012 to 2 per cent from 2.2 per cent, citing a slowdown in overseas economies and the appreciation of the yen.
A double dose of bad news is hitting the already battered Japanese economy. The once-mighty export powerhouse is expected to report its first annual trade deficit since 1980, just as the slumping global economy cripples growth prospects.
The expected trade deficit caps a year in which virtually everything that could go wrong for the world's third-largest economy did. The March 11 earthquake and tsunami halted much of the country's economic output for months, the surge of the yen as a haven currency eroded Japan's competitive position, and flooding in Thailand disrupted production for Japanese companies both there and in their home operations.
The tsunami caused a meltdown at the Fukushima Daiichi nuclear power plant, triggering a radiation leak that led to shutdowns of nuclear plants throughout Japan and massive imports of natural gas, which is reflected in monthly trade deficits for much of 2011.
The anticipated economic recovery in 2012 is now being scaled back as both the Bank of Japan and the International Monetary Fund cut their forecasts for growth this year.
The gloomy outlook for Japan is another sign that the health of the global economy is fragile amid the sovereign debt crisis in Europe, the tepid recovery in the United States and slowing growth in China.
"Japan's economic activity has been more or less flat, mainly due to the effects of a slowdown in overseas economies and the appreciation of the yen," Japan's central bank said as it trimmed its outlook for fiscal 2012 to 2 per cent from 2.2 per cent.
The IMF was even gloomier, forecasting growth of 1.7 per cent this year and 1.6 per cent in 2013, down from projections of 2.3 per cent and 2 per cent respectively made in September.
What's more, the Japanese central bank is also revising downward its assessment of fiscal 2011.
"The implication is that Japan's already deep 2011 recession is actually deeper than previously reported and the recovery will be more muted than otherwise hoped," Bank of Nova Scotia economists Derek Holt and Dov Zigler said Tuesday in a note to clients on the data.
Racking up an annual trade deficit marks the end of an era when Japanese cameras, televisions, automobiles and semiconductors dominated markets around the globe and the names Sony, Panasonic, Canon and Toyota became household words.
But the challenges to those export giants and others have been growing for a decade or more.
The flat-screen television that sits in the family room of virtually every middle-class house in North America is now more likely to be a Samsung or an LG made in South Korea, China or southeast Asia than a Sony or Toshiba made in Japan. Hitachi Ltd. acknowledged that fact earlier this week when it said it will stop making its own flat-panel televisions in Japan.
Some of the export giants were better prepared than others for the rise of the yen to the current level of about 77 to the U.S. dollar.
Camera and photocopier giant Canon Inc., for example, has shifted about 60 per cent of its production outside Japan, chairman and chief executive officer Fujio Mitarai told The Globe and Mail in December.
The March 11 earthquake did more damage to the company than the rise of the yen, Mr. Mitarai said, noting that 300 suppliers were affected by the quake and the tsunami, which for three months meant Canon did not have all the components it needed to make its products.
"One little screw, if you don't have that, you can't build a camera," he said.
The Bank of Japan said it will continue "powerful monetary easing" as one way of trying to encourage and sustain growth in the country.
With files from Reuters and Dow Jones