Japan Govt Cautious On Europe Risks, Still Sees Deflation

Japan's economy is growing, but Europe's debt crisis, would fluctuations in financial markets and deflationary risks to the outlook, said the government Monday.

In its monthly report for May, the government kept its assessment of the economy unchanged for the third straight month as capital expenditures bottoms out at the increase in exports and production.

But it adds a sentence to the May report warning on Europe and the financial markets as the region's debt crisis triggered fears of sovereign risk and global equity markets to tumble.

"You should be aware of potential risks for Japan's economy that a possible slowdown in the economy abroad, particularly in Europe, fluctuations in financial markets and the influence of deflation, the report says.

Japan's economy grew 1.2 percent in the first quarter, the biggest increase in three quarters of robust exports to Asia, but analysts expect growth to slow as consumption begins to lose support from government stimulus measures.

The Government's assessment of the economy around that track the Japanese central bank said last week that the economy started recovering moderately.

The euro went to the August 1 1/2-year through vs yen EURJPY = last week as the euro zone € 750.000.000.000 (942.8 billion U.S. dollars) safety net for the debt obligations of its members have failed to ease worries about weak public finances.

The yen rose against the dollar JPY prompting a warning from Japan's finance minister Friday that excessive currency moves were undesirable. A strong yen hurts Japanese exporters by making their goods less competitive abroad.

The government stuck to see that Japan is in mild deflation and repeated its call to the central bank to support the economy through appropriate and flexible policy.

When the government first announced in November that Japan was in mild deflation, relieved BOJ policy twice and said it will not tolerate zero inflation.

The BOJ kept monetary policy unchanged at a meeting that ended Friday, but planned a new loan scheme targeted growth industries, which it described as a long-term strategy to beat deflation.