Japan's fragile economic recovery is in danger of evaporating, the Bank of Japan has warned in its first pessimistic monthly report in almost a year.

The health of public and private sector finances is stabilising, the Bank said.

There is no future unless they go through with this

Yutaka Imai OECD economist

But weakness in the US spelt trouble for Japan's battered, export-reliant industries, leading to "greater uncertainty towards recovery", it said.

The news follows signs that quarterly growth slowed from 1% to 0.7% between June and September - and a warning from international observers that far from growing, Japan's economy could shrink next year.

Exports in trouble

Throughout the second half 2001, downgrades to the Bank's economic forecasts were a monthly fixture.

The last was in December, since when Japan has shown some signs of resurfacing from what many feared would be the fifth recession in a decade.

But the willingness of consumers in Europe and the US to keep spending, thanks to low interest rates and booming house prices, is waning, spelling trouble for exporters such as Nissan or Sony.

In contrast, falling wages and rising unemployment have combined with sliding prices at home to keep domestic demand in the doldrums.

Confusion over plans to deal with the multi-trillion yen bad debt burden hanging over Japan's banks has helped reinforce the feeling that the recovery could be over before it really takes hold.

Off the boil

That is certainly the feeling at the Bank of Japan, which described the US and European recovery as "anaemic".

The Paris-based Organisation for Economic Co-operation and Development (OECD) concurs.

Concerted effort - thus far conspicuously absent - from the government and private sector to dig banks out from under their debt burdens is required, it said.

"There is no future unless they go through with this," OECD economist Yutaka Imai told a press conference.

The optimistic view, the OECD's review of the Japanese economy said, was for this year's 0.7% contraction to be followed by 0.8% growth in 2003.

"But the balance of risks is now on the downside given signs of slower growth in the world economy and the possibility of a further deterioration in financial conditions, which might lead to a worsening of deflation," it warned.