Japan worries that exports could be hit by a US slowdown

The Bank of Japan said annual growth in bank loans was the slowest in nearly two years, a sign that business activity is slowing among small firms.

On Friday, Bank of Japan Governor Toshihiko Fukui said the pace of economic growth was slowing.

His comments came as the country's main stock index fell to a 26-month low.

The Nikkei fell 277.32 points, or 1.93%, to 14,110.79 points, its lowest level since November 2005.

On Thursday, Goldman Sachs said that Japan is in danger of following the US into recession later in 2008. This followed earlier warnings from it and Merrill Lynch that the US is heading for a recession.

US outlook

High oil prices, unstable markets and an uncertain outlook for the US economy have prompted concerns about the Japanese economy.

An economic slowdown in the US - Japan's biggest export market - and dollar weakness could hinder Japan's economic recovery.

Bank of Japan deputy governor Toshiro Muto has admitted that global economic uncertainty is affecting the Japanese economy.

On Thursday in Washington, Federal Reserve boss Ben Bernanke said that the outlook for the US economy in 2008 had worsened.

Lower rates?

Mr Bernanke also indicated he was ready to cut US interest rates later this month, a move that could lead to a cut in interest rates in Japan.

"Gradually, people are seeing a chance of a (Bank of Japan) rate cut this year," said Hitomi Kimura, fixed income strategist at JP Morgan Securities.

"Globally, we're seeing the possibility of a recession, and that would be the only case in which it would consider a cut."

"Clearly, sentiment is weak, and after Bernanke and Muto, people are getting worried," he added.

However Japan's Economy Minister Hiroko Ota said she "did not think the economy is slowing down".

She said that "no indicators show a clear sign of slowing, and the economy is recovering".