The May report said that the pace of decline in industrial production is increasing as exports continue to fall, adding to pressure on corporate profits and business investment.
"Net exports continue to decrease, reflecting a slowdown in overseas economies, such as in the U.S. and East Asia," it said. "Industrial production is declining sharply, reflecting developments in final demand and as excessive inventories of electronic parts and some materials are building up."
The bank noted that both corporate profit and business investment conditions appear to be getting worse as slowing exports depress economic activity.
Capital spending, one of the few beacons still shining amid Japan's economic gloom, will likely start contracting and household incomes will gradually take a turn for the worse, the report said.
With exports unlikely to pick up for some time and output in a declining trend, business investment is expected to "peak out and then downturn," it added.
The negative adjustments are likely to continue for "some time." Output is likely be the worst hit area of the economy, it said.
The BOJ expressed hopes that a gradual recovery in the U.S. and other overseas economies in the latter half of this year would kick-start a vital recovery in Japan's exports.
The central bank noted that the weaker yen was helping to make Japan's exports more competitive by raising the cost of imports and thus offsetting deflationary pressures.
Economic trouble in Japan could have widespread effects on the United States' economy. Japan is a big market for exports and a very active participant in the American bond market.
Japan holds around 11 percent of America's public debt, roughly $340 billion. If those investors pulled out, that could scuttle America's plans to retire debt and wreak havoc on interest rates and the dollar's value relative to other currencies.
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