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BOJ keeps upbeat view on regional Japan, sees limited tax hike impact

Bank of Japan Governor Haruhiko Kuroda casts his shadow on a wall as he drinks a cup of water during a news conference at the BOJ headquarte
Bank of Japan Governor Haruhiko Kuroda casts his shadow on a wall as he drinks a cup of water during a news conference at the BOJ headquarte

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan maintained its upbeat view on most of the country's regional economies, adding to reassurances from its governor that the world's third-largest economy can ride out the pain from a sales tax hike without additional stimulus.

Also on Thursday, a Reuters survey showed manufacturers were more confident about business conditions in April and saw a more moderate dip over the next three months, suggesting the damage from the tax hike may be less pronounced than thought.

The optimism may add to a growing consensus in financial markets that the central bank will hold off on easing policy until around July to spend more time scrutinizing the impact from the April 1 tax hike on domestic consumption.

In a quarterly report analyzing nine regional sectors of Japan, the BOJ raised its assessment for one and left unchanged its view for the rest to say they are all recovering moderately. None of the regional assessments were revised down.

"Domestic demand has been firm, production has been rising moderately as a trend, while job markets and income conditions have been improving," according to the report compiled at a meeting of the central bank's regional branch managers.

The report did mention some regions seeing declines in housing starts and sales of luxury items at department stores, in reaction to a boom in demand ahead of the April 1 tax hike.

But while demand rose more than expected ahead of the tax increase, the subsequent decline after the higher levy is within expectations, said Shigeki Kushida, who as head of the BOJ's Osaka branch oversees the Kinki western Japan region.

"Business sentiment hasn't deteriorated and remains relatively firm even after the tax hike," Kushida told a news conference.

"Conditions are gradually falling in place for the economy to overcome the sales tax hike," he said, pointing to signs companies in his region are hiring more and gradually raising wages to fill labor shortages.

EXPORTS A SOFT SPOT

Many private-sector analysts agree with the BOJ that economic growth will rebound in the July-September quarter after suffering a mild contraction in the current quarter as the tax hike cools household spending.

But some have warned that the tax hike may hit the economy more than expected before exports rebound enough to take up the slack, in which case the BOJ may be forced to act again to boost growth.

In a speech to the regional branch managers' meeting, BOJ Governor Haruhiko Kuroda stuck to his view the economy will recover moderately albeit with some bumps caused by the tax hike, signaling that he saw no need to expand stimulus now.

But he stressed the BOJ was ready to ease policy further should risks threaten the achievement of its goal of accelerating consumer inflation to 2 percent by around April next year.

"We will adjust policy when needed while scrutinizing both upside and downside risks to the economy and prices," he said, repeating the BOJ's usual line on monetary policy.

With most regions pointing to resilience in domestic demand, the soft spot for the economy remains exports, which have failed to pick up quickly enough as the BOJ had expected.

"Our view is that exports will eventually pick up in line with improvements in the economy. But for now, we haven't seen enough data telling us when and by how much exports will rise," Kushida said of the Kinki western Japan region - home to major electronics manufacturers like Panasonic Corp <6752.T>.

The BOJ's regional report is based mostly on the performance of regional economies up to March but incorporates developments after the increase in the sales tax on April 1.

The central bank has stood pat since offering an intense burst of monetary stimulus in April last year, when it pledged to double base money via aggressive asset purchases to accelerate consumer inflation to 2 percent in roughly two years.

The BOJ will hold its next policy review on April 30, when it will issue new long-term economic and price forecasts in its twice-yearly outlook report.

(Reporting by Leika Kihara; Editing by Dominic Lau and Chris Gallagher)

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