TOKYO (MNI) - The Japanese government on Friday left its overall assessment of the economy unchanged for the fourth straight month, repeating it is "picking up," with capex leveling off now, but warned of the damper of job cuts and deflation.

"Although the economy has been picking up, it is short of autonomous factors and remains in a difficult situation with a high unemployment rate," the Cabinet Office said in its monthly economic report for November, referring to the fact growth has been supported by fiscal and monetary stimulus as well as a recovery in overseas demand.

The government mentioned "deflation" in the report for the first time in about three years since June 2006, although it was not highlighted in the overall assessment but listed at the bottom of bullet points outlining how different segments of the economy are doing.

"Recent price developments show that the Japanese economy is in a mild deflationary phase," it said.

Keisuke Tsumura, parliamentary secretary of the Cabinet Office for economic and fiscal policy, told reporters that the government and the Bank of Japan share "the assessment of the current economic and price conditions" although that they may have different ways of describing price drops (the BOJ doesn't use the term deflation).

The government maintained its cautiously optimistic view in the November report while reflecting a slight improvement in the job market that was referred to as "worsening" previously.

"As for short-term prospects, although the employment situation remains severe, the economy is expected to pick up, reflecting improvement in overseas economies."

Looking further ahead, the government urged a close watch on the downside risks including "a further worsening of the employment situation, concerns over slowdown in overseas economies, and the influence of deflation and fluctuations in the financial and capital markets."

Cabinet Office economists believe that in the broadest sense -- based on CPI, GDP deflator, output gap and unit labor costs -- Japan has never moved out of the stubborn deflation that hit the country in 2001.

They have argued that if there is any risk of the economy slipping back into continued price drops, the government must not declare an end to the phenomenon.

However, the government dropped its reference to "deflation" in the main text of its monthly report after keeping it for about five years through June 2006 since officially acknowledging that Japan was in mild deflation in the April 2001 report.

Now in light of some data indicating prices have been depressed, top policymakers overseeing the Cabinet Office have concluded that it is time to tell the public the nation is in deflation, said Tsumura.

Among the data, prices in Japan measured by the U.S. style core consumer price index (excluding food and energy) posted the ninth straight year-on-year decline in September; nominal GDP growth (-0.1% q/q) was below real GDP growth (+1.2%) for two quarters in a row through July-September; and the output gap remains large, with supply in the economy outstripping demand by 7.8% in April-June.

"We have been talking about thoroughly checking the downside risk of the employment situation and prices, so we think it is also natural to refer to prices in the report," said Tsumura.

"We don't have an established definition for deflation by the government," he said. "But if you can confirm a basic trend for prices, you don't have to wait for prices to continue falling for two years (before confirming that it is deflationary)."

The latest data showed that Japan's core CPI, which excludes fresh food but includes energy, fell 2.3% in September, posting the seventh straight year-on-year decline but slowing from the record 2.4% drop hit in August.

On Monday after the release of the Q3 GDP, Economic and Fiscal Policy Minister Naoto Kan told reporters that he was "worried that we may be sliding into a deflationary situation," adding that the government will keep in close contact with the Bank of Japan "to fend off deflation."

This month the government upgraded its assessment of business sentiment for the second straight month, saying capex is "starting to level off" instead of "decreasing" after the third quarter GDP data showed capex posted its first q/q rise in six quarters.

The government also revised up its view on the employment climate for the first time in 27 months, saying it "remains severe" instead of it is "worsening and extremely severe."

Japan's unemployment rate fell unexpectedly to 5.3% in September from 5.5% in August and a record high of 5.7% in July as the pace of job losses from a year before slowed.

The number of jobless workers rose by 920,000, or 33.9%, from a year earlier to 3.63 million in September, above three million for the seventh consecutive month.

Meanwhile, the ratio of job offers to job seekers at placement offices stood at 0.43 in September (43 job offers for every 100 people looking for work), up from a record low of 0.42 posted in July.

Through July 2009, the government had revised up its overall economic assessment for three straight months, the first such successive upgrades in about six years. Japan's last economic expansion, its longest post-war stretch, began in early 2002 and ended in late 2007.

From February to April this year, it described the worst recession for Japan in half a century: "The economy is worsening rapidly while in a severe situation."

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