Japan's Economic Growth Seen Softer Than Expected

Government of world's second-largest economy cuts fiscal-year growth rate to 1.9 percent from 2.1 percent.

TOKYO (AP) - Japanese economic growth will miss original forecasts, the government warned Tuesday, but both the Cabinet Office and Bank of Japan said the country's recovery will regain strength in 2007.

The mixed outlook comes as the world's second-biggest economy weathers a spate of troubling economic data as it heads into the new year. Sluggish consumer spending, long a weak spot in Japan's export-oriented economy, undercut growth much worse than expected in the most recent quarter.

The Cabinet Office reflected that slump in its year-end annual economic report, released Tuesday, by downgrading its full-year economic growth forecast to 1.9 percent for the fiscal year ending in March.

The outlook contrasts with the Cabinet's forecast of 2.1 percent growth made just six months ago.

But robust corporate earnings are expected to push up workers' income and fuel domestic consumption _ helping rev up growth to 2 percent next year, the Cabinet report said.

Finance Minister Koji Omi called it a ''relatively bright'' outlook, saying the economy is on ''sound footing.''

The view was echoed by the Bank of Japan, which on Tuesday released a separate monthly economic report for December. While the BOJ report didn't address the issue of slowing growth for the whole of 2006, or give a forecast for 2007, it said consumer spending was a weak spot that would continue to improve.

The central bank said Japan's economy was ''expanding moderately'' and was expected to keep doing so.

The future assessments follow data released earlier this month showing that growth in the July-September period was far weaker than first thought. The government revised the third-quarter expansion rate to an annual pace of 0.8 percent from 2 percent due to weaker consumer spending and capital investment.

''As we move into 2007, we're going to see a fuller recovery,'' said Glenn Maguire, chief economist at Societe Generale in Hong Kong. He said the Cabinet's 2007 outlook was conservative and growth could hit 2.75 percent.

Still, concerns about weak consumption, which account for more than half of Japan's economy, may be pressuring the Bank of Japan to hold off on interest rates hikes.

On Tuesday, the Bank of Japan concluded its last policy meeting of the year by leaving its benchmark interest rate unchanged at 0.25 percent, turning attention to a possible hike early next year.

The central bank raised interest rates in July for the first time in six years to 0.25 percent from virtually zero.

But some lawmakers and business leaders worry that raising rates too quickly could stifle Japan's recovery by making the cost of borrowing too expensive.

The BOJ has pledged not to raise rates until consumer prices show a clear sign of rising.

Economy Minister Hiroko Ota suggested Tuesday it was too soon to declare that Japan has escaped the spiraling cycle of falling prices, known as deflation, that had hamstrung the economy for years.

''The end of deflation has come into range,'' she said. ''But we must watch the situation for the time being.''

The core consumer price index, which excludes volatile fresh food prices, rose 0.1 percent in October from a year earlier. That was lower than the 0.2 percent increase in September and 0.3 percent in August.

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