April 17 (Bloomberg) -- The Bank of Japan cut its economic evaluation in seven of the country’s nine regions, saying companies and consumers are spending less as the recession deepens.

The central bank said the regional economy has been “deteriorating significantly,” lowering its overall assessment in a quarterly report released in Tokyo today.

The policy board will probably lower its forecasts for the economy and consumer prices in its semiannual outlook on April 30, analysts say. Governor Masaaki Shirakawa said today that weaker outlays by businesses and households will prolong the recession even as exports and production start to improve.

“The Bank of Japan will probably underline the risk that declining growth and prices may be sharper than projections,” said Akio Makabe, a professor of economics of Shinshu University in Nagano, central Japan.

The central bank left its view unchanged for the Tokai region in central Japan and Chugoku in western Japan, where it said there are signs that output may stop declining. Production may also improve in Hokuriku and Kanto-Koshinetsu as companies get rid of inventories, it said.

“Expectations are rising among businesses that declines in output may hit bottom this quarter, following the drastic plunge last quarter,” said Hideo Hayakawa, head of the Osaka branch. Still, he added, many companies are unsure whether production will rise after leveling off.

Weaker Spending

Shirakawa told the branch managers that companies are less willing to spend because profits are falling more steeply than before. Consumer spending is weakening because households are facing declining wages and job cuts, he said.

Sharp Corp., which last week posted its first loss in half a century, is eliminating 1,500 workers and closing two production lines as global flat-panel television sales slump. Canon Inc. said yesterday that it delayed construction of a toner-cartridge factory in Oita, southern Japan, because the world recession has weakened demand for office equipment.

Demand for services fell 0.8 percent in February from a month earlier as companies cut production and pay cuts damped consumer spending, a Trade Ministry report showed today.

Global financial markets remain under “severe strain” and Japanese companies both large and small are struggling to obtain funding, the governor said.

“The economy is falling at a slower pace now, but its decline has yet to stop,” said Hayakawa. “Few businesses are confident about how quickly the global economy will rebound.”

Signs of Recovery

Some indications of a recovery are emerging.

Consumer confidence rose to a five-month high in March, the Cabinet Office said today, as the government began handing out cash to households as part of stimulus measures and the Nikkei 225 Stock Average rebounded from a 26-year low.

The Federal Reserve said in its Beige Book this week that the U.S. contraction eased across several of the biggest regions last month, with some industries “stabilizing at a low level.” Fed Chairman Ben S. Bernanke said the U.S.’s “sharp decline” may be slowing.

In China, industrial output growth accelerated in March and urban fixed asset investment surged.

In January, BOJ board members predicted the economy would shrink 2 percent in the year ending March 2010 before expanding 1.5 percent next fiscal year. Consumer prices will slide 1.1 percent this year and 0.4 percent in the next, they said.

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

Last Updated: April 17, 2009 03:53 EDT