But central bankers are hardly complacent as they remain concerned
about the outlook for exports, a soft spot in the economy that has
failed to pick up despite the boost from a weak yen that gives
Japanese goods a competitive advantage overseas.
Japan's government kept its economic assessment unchanged at its
monthly report on Tuesday, saying the world's third largest economy
is "expected to recover moderately" as the effect of a sales tax
hike in April eases gradually.
But it turned slightly more cautious about factory output, which in
June posted its biggest decline in more than three years due partly
to weak overseas demand.
Japan's economy contracted a hefty 6.8 percent in the second quarter
due largely to the tax-hike pain, prompting many private-sector
analysts to downgrade their growth forecasts for the year ending in
March to around 0.5 percent, just half the 1.0 percent expansion
estimated by the BOJ in July.
The central bank is seen cutting its GDP estimate for the current
fiscal year, which ends in March, when it next updates its economic
and consumer price forecasts in a semi-annual review on Oct. 31. But
any downgrade will be minor and unlikely to greatly affect its
bullish projections for inflation to climb near 2 percent next
fiscal year, people familiar with its thinking say.
BASIC SCENARIO STAYS
"The basic scenario of a moderate economic recovery pushing up
inflation remains in place," one of the people said on condition of
The downgrade in its economic estimate would be largely due to the
sharp contraction in second-quarter GDP, although many BOJ officials
remain optimistic that growth will rebound from the current quarter
as the tax-hike effect begins to ebb.
In a statement to be issued at a rate review next week, the BOJ is
likely to say the economy is recovering moderately with the tax-hike
impact "gradually beginning to subside", signaling its relief that
consumption is holding up even as households feel the pinch from the
higher levy, the sources said.
That will be a slightly rosier view than the current assessment that
the economy is recovering moderately, albeit with some speed bumps
caused by the tax hike.
It will also be more optimistic than a warning made in Tuesday's
government report that the tax hike could have prolonged effects on
BOJ Governor Haruhiko Kuroda said earlier this week that consumption
is "back to normal levels now" and that he expected a recovery in
GDP in July-September.
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SOME RISES IN INCOME
Behind the BOJ's optimism lies a steadily improvement in job and
household income conditions. Regular pay rose 0.2 percent in the
year to June, marking the first increase in more than two years, and
summer bonuses were up 2 percent, easing some of the pain from the
The BOJ hopes that such increases in wages, driven by a tightening
job market, will support household spending and encourage companies
to raise prices of goods and services. That, in turn, will allow
Japan to meet the BOJ's 2 percent inflation target next fiscal year,
central bank officials say.
But a lack of pick-up in exports remains a key concern for many
central bank policymakers. They worry that the economic recovery may
falter if companies do not see an increase in overseas shipments, as
that is needed to make up for the slowdown in domestic demand.
Exports rose in July for the first time in three months in a
tentative sign that overseas demand is starting to recover, but
probably not enough to nudge the BOJ into reviewing its assessment
that exports are "weakening," the sources said.
The BOJ is widely expected to keep monetary settings intact at its
next rate review on Sept. 3-4 and scrutinize a slew of indicators
out this Friday, including July's factory output and consumer
spending figures that will likely show an uninspiring recovery from
the sting of April's tax hike.
(Additional reporting by Sumio Ito and Yoshifumi Takemoto; Editing
by Richard Borsuk)
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