By Takashi Mochizuki
The Japanese government acknowledged for the first time Tuesday that Toyota Motor /zigman2/quotes/200537742/composite TM -0.67% Corp.'s massive global recall could have a knock-on effect on the world's second-largest economy, which is struggling to overcome deflationary pressures.
Japan downgraded its assessment of exports in its economic report for February, partly because of concerns stemming from Toyota's recall of more than eight million vehicles world-wide.
Akio Toyoda , the car maker's president, is set to testify before the U.S. Congress on Wednesday.
Toyota's pole position as the world's largest auto maker means that it is one of the leading exporters in Japan, at a time when the country's economic recovery is fragile and susceptible to external shocks.
Shipments of cars and automobile parts accounted for about 15% of Japan's overall exports in 2009, analysts say. Daiwa Research Institute says if Toyota's recall issue worsens, the fallout could push Japan's nominal gross domestic product down by 0.12 percentage point in the future.
The government left its overall economic assessment unchanged for the seventh straight month, saying "the economy has been picking up," but downgraded its assessment of exports to "increasing moderately" from "increasing" a month ago.
The downgrade was partly due to "Japanese cars' recall issues," said Keisuke Tsumura , a parliamentary secretary at the Cabinet Office.
"It is very disappointing," said Mr. Tsumura, citing private research showing sales of Japanese cars in the U.S. dropped by 4.3% in January from a year ago.
He added that feedback from U.S. retailers shows demand for Japanese cars in the U.S. isn't in good shape in February, either.
"I've heard that sales [of Toyota's cars] have been decreasing in a part of overseas markets, so we need to watch the impact" on the Japanese economy, said Naoto Kan, finance and economy minister, at a news conference. "Still, I don't expect the [recall] problem to affect the economy soon."
But the possibility that the recall could pose a downside risk to the export-reliant economy hasn't been ruled out in the medium term, and the government is alert to whether additional economic stimulus measures may be needed.
Toyota has recalled more than eight million vehicles world-wide following a series of complaints and a slew of lawsuits linking vehicle flaws to 30 deaths in the U.S.
The government is also wary about the impact of Toyota's recall on domestic private spending although there hasn't been any notable impact yet.
It kept its view unchanged that private spending is "picking up" in February.
"We are concerned that the car recall issues may negatively affect other sectors of the economy, such as retail, services and transportation," said Hiroshi Watanabe , an economist at Daiwa Research Institute.
Aside from the Toyota recall, Mr. Tsumura said moderating shipments to Asia contributed to the downgrade in the export assessment. Official data show the volume of exports fell 1.3% from a month earlier in December.
On the price side, Tokyo reiterated in February that the country's economy is in mild deflation and the government will work closely with the Bank of Japan to fight it.
"We are adopting the same stance that we should combat deflation," Mr. Kan said.
Separately, Toyota's domestic and global output soared in January, before it was hit with the recall crisis.
Toyota said Tuesday that it boosted production in Japan last month by 29% to 268,888 vehicles. Meanwhile, its overseas output in January shot up 84% to a record for the month of 375,037 vehicles. Of the total, U.S. output more than doubled to 98,000 vehicles.
A Toyota spokeswoman attributed the increased production figure to a low basis of comparison with the year-earlier month, when the company was still adjusting to a slump in demand in the wake of the economic slowdown. She said it is hard to gauge the extent of the recall's impact on the monthly data, but there appears to be no negative impact reflected.
The company's domestic sales in January increased 45% to 121,043 vehicles, while exports shot up 44% to 130,928 vehicles. With the inclusion of units Daihatsu Motor Co. and Hino Motors /zigman2/quotes/209422954/delayed JP:7205 -1.17% Ltd., Toyota's domestic output in January totaled 329,124 vehicles, up 19% year-to-year.
Hiroyuki Kachi contributed to this article.
Write to Takashi Mochizuki at firstname.lastname@example.org