TOKYO (Reuters) - Japan’s government said on Tuesday that the economy was now at a standstill, highlighting the growing gulf between developed and emerging countries at the heart of global currency tensions.

A man walks past an advertisement signboard at a shopping district in Tokyo, October 1, 2010. REUTERS/Kim Kyung-Hoon

In a monthly report, the government downgraded its assessment of the economy for the first time since February 2009. A senior Japanese official said further pressure on the economy, which is mired in stubborn deflation, could tip it into recession.

“If the economy turns out as expected in our main scenario, we may end up describing the current situation as a soft patch,” said the official at the Cabinet Office, which compiled the report.

“But if it comes under further downward pressure, it could end up slipping into recession,” he said.

Faltering recoveries from the global financial crisis in developed economies have pushed global investors into emerging markets in search of higher returns, driving up their currencies.

The move has been exacerbated by widespread expectations that the U.S. Federal Reserve will print billions of dollars to try to lift the U.S. economy, sparking concerns that the extra liquidity will find its way into emerging markets.

The currency tensions will dominate a Group of 20 finance ministers’ meeting in South Korea starting on Friday and a G20 summit in November, as officials look to tackle the economic imbalances and the threat of competitive currency devaluation.

“Currencies will be the topic that many people will be talking about ... at the G20. I hope that good ideas will be put forward there and we will explain the present situation in Japan,” Finance Minister Yoshihiko Noda said.

Japan’s policymakers have grown increasingly concerned by a slowdown in growth in the export-reliant economy, prompting the government to draw up a supplementary budget and the central bank to offer cheap loans and to promise to buy assets.

A rise in the yen to a 15-year high against the dollar added to these woes, sparking the first currency intervention by Japan in six years.

YEN’S RISE HURTS

The latest assessment by the government was the first time since July 2008 -- just before the onset of the last global recession -- that it had described the economic situation as at a standstill.

It said the economy could be depressed by a slowdown in the global economy and swings in share prices and foreign exchange rates as a rising yen threatens exports.

“Economic movements appear to be pausing recently,” the report said, while repeating that the economy was in a mild deflationary phase.

Previously, it had said the situation was becoming increasingly severe although the economy was recovering, with some movement seen toward a self-sustaining recovery.

The report said some weakness could be expected for the time being but the economy was likely to pick up with help from improvement in overseas economies and government stimulus steps.

The government also cut its view on exports and industrial output, saying they were weakening, which prompted the downgrade of its overall economic assessment.

A senior government official warned that if weakness persisted in exports, due to a slowdown in Asian economies, and in production, it would hurt corporate capital spending and personal consumption, choking off movement toward a self-sustaining economic recovery.

The yen’s rise clouds the outlook as it dampens sentiment, he added.

The yen is still close to a 15-year high against the dollar, undermining the earnings and competitiveness of Japan’s export sector and so acting as a drag on the stock market.

The government said it wanted the Bank of Japan to support the economy through “appropriate and flexible” monetary policy while the two branches work closely together -- phrasing it used when it announced 5.05 trillion yen ($62 billion) in stimulus spending on October 8.

The central bank surprised markets on October 5 by cutting interest rates and pledging to buy 5 trillion yen worth of assets to pump more money into the flagging economy.

Japan’s economic growth slowed from an annual clip of 5 percent in January-March to 1.5 percent in the second quarter, with analysts expecting it to hit a soft patch ahead as the global economy slows and stimulus-driven consumption runs its course.

($1=81.26 Yen)