JAPAN'S Economic Planning Agency declared on June 10 that the country's economy had ''largely hit bottom''. Even this tepid verdict has been greeted with guffaws in most quarters because a recent string of economic figures, some of them weak, has revived debate about the direction Japan's economy is taking. Among the gloomier ones is lending by Japan's city (large commercial) banks, which grew by only 0.3 per cent in the year to May, according to the Japan Bankers Association. Domestic car sales fell heavily in May, the second consecutive month in which this crucial industry registered a double-digit decline. Industrial production fell in April, and tax revenues are running below estimates for both this fiscal year and last. Taken with such signs of economic weakness, the recent surge in the yen has raised expectations that the Bank of Japan will soon cut the official discount rate (ODR) again. Japan's currency has gained 17 per cent against the dollar since February 1, and on June 10 it closed in Tokyo at its strongest figure - 106 - since the war. Yet hopes of lower interest rates are likely to be disappointed. Despite exporters' growing protests, there is now a strong consensus among officials at the central bank that the economy does not need further monetary stimulus after the ODR cut from 31/4to 21/2 in early February. The bank's research department expects the economy to tread water until the last quarter of this year, and only then to show signs of real recovery. It will be late summer at the earlier before enough is known about Japan's economic performance to judge whether the bank has again erred on the side of optimism. The Bank of Japan sets monetary policy mainly in response to developments in the real economy. Financial indicators - such as bond yields, real interest rates, the stockmarket or even currency parities - are deemed of less importance. Yet, interest rates should cause concern at a time when deflation looms. Banks increased their long-term prime lending rate to 5.4 per cent on June 1, after bond yields rose in a sell-off by investors. Wholesale prices are already falling. Peter Morgan, Merrill Lynch's Japan economist, expected consumer-price inflation to be running at an annual rate only 0.5 per cent by the end of the year. He also thought that the official consumer-price index understates the deflationary pressures that were now evident in Japan. The strength of the yen and retailers' scanty profit margins are prompting widespread discounting from posted prices in shops. The monthly indicator on which the central bank relies most heavily - even more than it does on changes in the money supply - is industrial production. The Bank of Japan expected production to fall in April and May and then pick up in June. Figures released on May 31 showed that it did drop in April, by 2.2 per cent compared with March. A survey of companies by the Ministry of International Trade and Industry which was published on the same day indicated that industrial production would decline by another 2.3 per cent in May, and then rise by 2.6 per cent in June. Confident that its economic forecast is broadly on target, the central bank is unlikely to cut its discount rate even if the yen does shoot beyond 100 to the dollar, a figure loaded with symbolic significance. That seems reason enough for foreign-exchange traders to keep betting on the yen. But the Bank of Japan is no Bundesbank. The finance ministry has the power to tell the central bank to cut interest rates. The worse the economy looks, the likelier it is to do so. This may be the calculation of foreign investors in the stockmarket who, along with Japan's government-owned savings institutions, are the main reason why shares in the Nikkei average are now selling at 80 times prospective earnings.