Japan will not fall into recession: BOJ report

TOKYO (Reuters) - Japan's economy will not fall into recession despite a likely slowdown in the first half of this fiscal year, partly because of firm growth abroad, the Bank of Japan said in the full text of its twice-yearly outlook report released on Thursday.

Still, the central bank warned of downside risks to the world's No. 2 economy, including uncertainty over fragile financial markets and rising energy prices.

In the core part of the outlook report on the economy and prices, the BOJ on Wednesday dropped its mantra of gradually "adjusting" Japan's low rates towards more normal levels for the first time in two years -- a sign that it gave up a bias towards raising rates.

BOJ Governor Masaaki Shirakawa also said the BOJ was putting more emphasis on downside risks than on upside risks in the outlook for the fiscal year that started on April 1.

The central bank now expects real gross domestic product for the year to register around 1.5 percent growth, revised down from a previous forecast of 2.1 percent.

"Although the deceleration in the pace of growth may continue through the first half of fiscal 2008/09, Japan's economy will not fall into open recession and will thereafter follow a path of moderate growth at around the potential growth rate," the full text of the report said.

The central bank added that the basic thinking behind the projection was based on relatively high growth in overseas economies; accommodative financial conditions; and minimal adjustment pressure on firms with regards to inventories, production capacity and employment.

The BOJ estimates Japan's potential growth rate to be around 1.5 percent or somewhat higher.

The report noted, however, that if production-related data does not show increased momentum in the near future, it could be judged that the nation's expansionary cycle -- the longest in the post-war era -- has already ended even though the economy remains basically firm.