2ND LD: BOJ downgrades Japan eco assessment, holds policy steady.

TOKYO, Nov. 18 Kyodo

(EDS: UPDATING WITH INFO, COMBINING STORY HEADLINED ' BOJ DOWNGRADES JAPAN'S ECONOMIC ASSESSMENT IN NOV. REPORT ')

The Bank of Japan downgraded its assessment of the nation's economy Thursday for the first time since May 2003, citing a slowdown in exports and production, while leaving its ultra-easy monetary policy unchanged.

''Japan's economy continues to recover as a whole, although the increase in exports and production seems to be coming to a pause,'' the central bank said in its report for November on recent economic and financial developments.

In the October report, the BOJ said, ''Japan's economy continues to recover.''

The downward revision, although a senior BOJ official insists the recovery trend is continuing despite a soft patch, follows Tuesday's downgrading by the government of its assessment of the nation's economy for November for the first time since June 2003, citing a slowdown in exports and production.

The BOJ's latest report, however, said personal spending, which accounts for 55 percent of Japan's gross domestic product, ''has been steady'' and that the employment situation ''has been on an improving trend.''

Looking ahead, the BOJ's latest report said, ''Japan's economy is expected to continue to recover.'' The October report had said, ''Japan's economy is expected to continue to recover, gathering stronger momentum.''

The November report said exports and production ''are expected to follow an uptrend, as it is projected that overseas economies will continue to expand and domestic demand will also continue to increase.''

However, it said the central bank will pay close attention to developments in high crude oil prices and global demand in the information technology sector, now that orders and capital investment in semiconductor manufacturing equipment have lost steam recently.

The downward revisions by the BOJ and the government are believed to have taken into account a series of weaker-than-expected economic data released recently, including GDP data for the July-September period.

Government data showed last Friday that Japan's GDP grew 0.1 percent in real terms in the July-September period, for an annualized expansion of 0.3 percent, due to slowing exports and slumping capital spending.

The growth figures were far below the private-sector forecast of 0.5 percent, or an annualized 2.1 percent.

The recent slowdown in exports apparently stems from recent credit-tightening in China and the United States, and weaker consumer sentiment in the United States amid high crude oil price rises, currently around $46 a barrel. Policymakers and economists have called for oil prices to stabilize at $30-$35 a barrel.

On prices, the BOJ reiterated that Japan's wholesale prices are expected to continue increasing for some time, partly due to rises in crude oil prices. Consumer prices are predicted to ''basically continue falling slightly on a year-on-year basis,'' indicating Japan will continue to suffer from deflation.

The BOJ's policy-setting panel the same day left its monetary policy unchanged, in a sign to show determination to ensure the ongoing economic recovery becomes sustainable and to fight deflation.

The nine-member Policy Board decided unanimously after a two-day meeting to keep the BOJ's target for the outstanding balance of current account deposits held by private financial institutions at the central bank in the range of 30 trillion yen to 35 trillion yen.

The BOJ said that should there be a risk of financial market instability, such as a surge in liquidity demand, it will provide more liquidity irrespective of the target.

The widely expected decision follows recent remarks by BOJ Governor Toshihiko Fukui that he is committed to the current ultra-easy policy until Japan fully recovers from deflation.

High crude oil prices, the strengthening of the yen against the dollar and a series of weaker-than-expected economic data made the central bank cautious about altering the quantitative credit-easing policy, analysts said.

''I don't think that the BOJ wants to give any sign that they are thinking of moving away from the quantitative monetary easing,'' said John Richards, Japan strategist at Barclays Capital Japan Ltd.

''Mr. Fukui has reassured the market there would be no premature end of quantitative easing,'' he said.

The quantitative credit-easing policy, under which it injects ample liquidity into the financial system to anchor short-term interest rates near zero, has been in place since March 2001.

The BOJ has said it will not end the unorthodox policy until year-on-year changes in the core nationwide consumer price index, excluding perishables, stabilize above zero.