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Bank of Japan offers bleak economic outlook

Bank of Japan Governor Masaaki Shirakawa offered a bleak assessment of the country's economic outlook on Wednesday as Europe's debt crisis hurts stock markets and keeps the safe-haven yen at stubbornly high levels.

His comments followed a stark warning by Federal Reserve Chairman Ben Bernanke that the U.S. economy was "close to faltering", in a sign of heightened alarm among central banks about the financial risks from Europe.

The Bank of Japan is set to keep monetary policy on hold at the end of a two-day review on Friday, but it has said it stands ready to act if slowing global growth and adverse market moves threaten to derail Japan's fragile recovery from March's earthquake and tsunami.

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"I hold a very severe view of Japan's economy and its outlook," Mr. Shirakawa told parliament when asked by a lawmaker if he agreed with the view that the country faced various risks such as persistent yen rises.

"Taking this view into account, the BOJ has conducted powerful monetary easing," he said, countering criticism that it was not acting aggressively enough to support the economy and stem sharp rises in the yen.

Mr. Shirakawa tends to use stronger language on Japan's economic weakness in parliament to reflect the more strident tone of lawmakers complaints and their demand for action from the central bank. In media briefings, he tends to be more measured in his remarks.

"I don't see a change in tone in the BOJ's view of the economy. Shirakawa ... is probably relieved that the tankan showed an improvement in business confidence," said Koichi Haji, chief economist at NLI Research Institute.

"Having said that, the BOJ is now faced with a strong yen and deteriorating overseas developments, both of which are things it can do little to change."

Elsewhere in Asia, the central bank chiefs of Taiwan and Thailand sounded less alarmed about the state of their economies.

Bank of Thailand Governor Prasarn Trairatvorakul said the economy would expand on the back of domestic demand, adding that the government should not excessively boost the economy by consumption. Taiwan's governor Perng Fai-nan said the central bank was "cautiously optimistic."

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Global stocks have taken a hit as investors doubt if European leaders are going far enough to stop the region's sovereign debt woes from sparking a full-blown banking crisis.

Asia is no exception, with the Tokyo bourse's Topix index falling on Wednesday to its lowest since March 2009.

Group of 20 finance leaders will likely debate ways to contain the crisis when they meet in Paris next week. Tokyo may help by purchasing more bonds issued by Europe's bailout fund, government officials said, a sign of its growing concern over developments in Europe.

The crisis in Europe clouds the outlook for Japan's economy, which is just emerging from recession as firms ramp up output to cover delays caused by the March earthquake.

The BOJ tankan survey on Wednesday showed that corporate sentiment turned positive in the third quarter, although export growth is slowing.

IMF projections suggest Japan's economy will grow 2.3 per cent in 2012, the fastest among advanced economies, partly on fiscal spending for reconstruction from the earthquake.

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The BOJ has said Japan's economy is expected to resume a moderate recovery by the end of this year, but has warned of risks to the forecast from factors such as fallout from the global economic slowdown and Europe's debt crisis.

On that basis, Mr. Shirakawa's remarks are broadly in line with that view and show the central bank's wariness over the potential damage to business confidence from a strong yen and slumping stocks.

In parliament, Mr. Shirakawa also stressed that the BOJ has taken bold steps to support the economy that are unmatched by other central banks, such as buying government bonds and trust funds investing in shares.

Like the U.S. Federal Reserve, it has cut interest rates close to zero.

At its meeting on Friday, the BOJ will likely stick to its recovery forecast. It is likely to debate whether the forecast remains valid at another rate review on Oct. 27, when it reconsiders its long-term growth forecasts in a twice-yearly economic outlook report.

The central bank has decided to stand pat since easing in August in coordination with the government's yen-selling currency intervention via an increase in its asset buying program, under which it buys government bonds and private debt.

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