Jan. 21 (Bloomberg) -- Japan's Finance Ministry cut its evaluation of five of 11 regional economies as housing investment declined and employment worsened.

Some areas are showing ``sluggishness,'' the ministry's regional-office chiefs said in a quarterly report released in Tokyo today. Japan's economy on the whole is expanding at a moderate pace, it said, leaving its overall economic assessment unchanged for a 16th quarter.

The Bank of Japan last week cut its evaluation in four of nine regions. The world's second-largest economy will keep losing steam for the time being, central bank Governor Toshihiko Fukui told branch managers at a meeting in Tokyo last week.

``Confidence is really getting worse in regional economies and at small companies,'' said Yuji Shimanaka, chief economist at Mitsubishi UFJ Research and Consulting in Tokyo. Sluggish growth may force the central bank may cut the key interest rate from 0.5 percent next month, Shimanaka said.

The ministry added the expression of ``sluggishness'' to its description of the regions for the first time since the fourth quarter of 2004, when a slump in production caused the economy to shrink. Conditions have worsened in the economies of Tohoku, Kinki, Kyushu, Fukuoka and Okinawa, today's report said.

It's necessary to keep a close watch on financial market turmoil caused by a U.S. housing recession and oil prices, the ministry said. Crude oil, which reached a record $100.09 a barrel on Jan. 3, has climbed 78 percent in the past year.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net

Last Updated: January 20, 2008 22:00 EST