RTTNews - Economic recovery in Japan and the rest of the world would be mild as removing excesses accumulated over the past several years will take considerable time, the Bank of Japan Governor Masaaki Shirakawa said Monday. Separately, the central bank raised its economic assessment.

Considering the fact that the current economic downturn has occurred during the process of the adjustment of various excesses that had accumulated worldwide over the past several years, it is very likely that the severe economic conditions will continue for some time, and the recovery thereafter will inevitably be mild and attended by high uncertainty, Shirakawa said in a speech in Kanazawa.

Shirakawa's remarks coincided with the release of BoJ's latest Economic and Financial Developments Report, in which the central bank upgraded its economic assessment, to match the view expressed last week along with the monetary policy decision to maintain the uncollateralized overnight call rate at 0.1%.

The central bank said economic conditions in Japan have been deteriorating, but exports and productions are beginning to level out. Last month, the central bank assessed significant deterioration in economic activity.

In the first quarter, gross domestic product fell 15.2% year-on-year, the biggest decline since records began in 1955, due to steep falls in exports and production.

According to Shirakawa, no one can predict exactly how the world economy will evolve after the current turmoil has ceased. Needless to say, however, Japanese firms need to continue to strive to find new frontiers, adapting to the changes in the global economy while making the most of their advantages. He asserted that a full-fledged recovery in Japan's economy would be attained only through these efforts and the central bank would strongly support these efforts from the financial side.

The central bank chief said Japan's economy cannot be expected to prosper without improving its productivity, the major factor determining the potential growth rate, through innovation. Fiscal and monetary policies are important, but they merely assume a supporting role in facilitating adjustments of excesses and proactive efforts by the private sector, he added.

According to Shirakawa, domestic private demand, such as consumption and business fixed investment, is likely to continue to weaken, given that the situation in household income and firms' profits.

Further, he noted that appropriate regulation and supervision are the prerequisites for the financial markets and financial institutions to properly fulfill their role of financial intermediation.

Shirakawa said he deeply recognized the importance of the designing of the financial architecture that enables the market mechanism to function appropriately as well as the significance of the implementation of economic policies based on the market mechanism.

Moreover, he noted that though major central banks reduced their key rates to nearly zero, they were aware of the side effects that extremely low interest rates may have on the functioning of money markets and the business conditions of financial institutions.

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