TOKYO, March 16 (Reuters) - Japan's government cut its view on corporate profits to its bleakest ever on Monday, as plunging global demand and sharp drops in production hammer companies' earnings.
In export-driven Japan, firms such as Toyota Motor Corp and Sony Corp have been rapidly scaling back output and cutting jobs to cope with plummeting sales, as the economy heads for its longest recession since World War Two.
The government, in its monthly report, kept its overall economic assessment unchanged, ending five months of downgrades, the longest such sequence since 2001.
But it remained wary of the outlook, repeating its warning that the economy could deteriorate more if the global financial crisis deepens and the world economy worsens further while stock markets stay volatile.
"The economy is worsening rapidly while in a severe situation," the government said, reiterating its weakest diagnosis since 2002, when the economy suffered from the collapse of the dot.com bubble.
"We kept the overall assessment unchanged for the first time in six months, but that doesn't mean the economy has stopped deteriorating," said Fumihira Nishizaki, director of macroeconomic analysis at the Cabinet Office, which compiles the report. "It is worsening at the same pace as before."
The report follows a government survey issued earlier this month that showed Japanese firms' profits tumbled 64.1 percent in the fourth quarter from a year earlier to 5.1 trillion yen ($52 billion), the lowest level for the quarter since 1985.
"Corporate profits are decreasing very substantially and business investment is decreasing," the government said, adding "very" to the assessment on corporate profits in its gloomiest ever prognosis.
The government also said the risk of the U.S. recession becoming more severe and prolonged is heightening, which bodes ill for Japanese exports of cars, electronics and other goods.
That compared with the previous monthly report that said there was a risk of the U.S. recession becoming more severe.
"We have no positive proof as to when the U.S. economy will recover as it depends on when financial markets will stabilise," said Tomoko Hayashi, director for overseas economies at the Cabinet Office.
Revised data last week confirmed the world's No.2 economy has suffered its deepest slump since the oil shock of 1974.
It showed fourth-quarter economic output dropped at a rate of 3.2 percent, or an annualised 12.1 percent, buttered by tumbling exports, a much steeper decline than suffered by other, less export-dependent, major economies.
Economists polled by Reuters predicted the economy would shrink 2.5 percent this quarter, which would mean an unprecedented four straight quarters of contraction. (Reporting by Tetsushi Kajimoto; Editing by Michael Watson)