The Bank of Japan on Thursday lifted its assessment of the Japanese economy for the seventh consecutive month and stated it is "starting to recover moderately," using the word "recover" for the first time in two and a half years amid an improvement in corporate sentiment and solid consumer spending.
The central bank last used the term to describe the state of the economy in January 2011, two months before the devastating earthquake and tsunami in northeastern Japan. At its two-day policy meeting through Thursday, the BOJ also maintained its target of achieving inflation of around 2 percent in two years to beat the deflation that has lasted for nearly two decades.
"It has become clear that the real economy has started to recover moderately," although it was earlier believed this would come on the back of financial market improvements, BOJ Governor Haruhiko Kuroda told a news conference in Tokyo. "The economy is moving in the direction expected by the BOJ."
He said economic activity is gradually growing, backed by resilience in domestic demand and a pickup in exports. He added employment conditions have also improved but admitted that regular wages have not started increasing, saying more time will be needed to see positive developments in that area.
"The economy is steadily moving upward, but it remains to be seen whether the movement will lead to an exit from deflation," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co., adding that higher regular wages would be key to ending deflation.
At the meeting, the nine-member Policy Board decided unanimously to maintain its aggressive monetary easing policy introduced in April, centering on doubling the monetary base and boosting purchases of government bonds.
In an interim review of its semiannual outlook report issued in late April, the BOJ revised down its projection for Japanese economic growth in the current fiscal year through next March from 2.9 percent to 2.8 percent.
Regarding the outlook for prices, the BOJ stuck to its view that the country's consumer price index will post a year-on-year rise of 1.9 percent in fiscal 2015, almost achieving its target of 2 percent inflation in about two years.
"I believe the 2 percent (inflation) target is achievable," Kuroda said. He said most Policy Board members believe it is highly likely that the BOJ will attain the target in the latter half of the three-year period through fiscal 2015, but some policymakers had expressed caution as they did in April.
But Kodama of Meiji Yasuda said there are not many market participants who think the BOJ can attain the goal in that time frame. "The bank will be forced to revise down its price outlook at some stage and it is likely to hammer out some additional easing steps."
He said the BOJ may lower its projection in October at the earliest when it releases its new outlook report.
In the interim review of the April outlook report, the central bank's median forecast was for rises in the core CPI excluding fresh food of 0.6 percent in the current fiscal year and 1.3 percent in fiscal 2014, down from 0.7 percent and 1.4 percent growth projected in April. The fiscal 2014 and 2015 forecasts exclude the effects of planned consumption tax hikes.
The central bank's economic growth forecasts for fiscal 2014 and 2015 were lowered to expansions of 1.3 percent and 1.5 percent, respectively, compared with 1.4 percent and 1.6 percent growth projected in April.
Overall, the country's growth rate and CPI change "will likely be broadly in line" with the April forecasts, the central bank said.
Regarding risks ahead, Kuroda said the BOJ will pay close attention to developments in China, though the world's second-largest economy is expected to continue to see stable and high growth.
He also said Japan's long-term interest rates are moving "very stably," while calling on the government to make progress on fiscal reconstruction in order to avoid a spike in interest rates caused by market distrust.
The upgrading of the BOJ's assessment of the current economic situation came after its Tankan quarterly survey showed business confidence among large Japanese manufacturers returned to positive territory in June for the first time in seven quarters, boosted by recovering exports amid a weakening yen and improving U.S. economy.
Sales at department stores are also increasing, as rising stock prices have stirred hopes for an economic recovery.
After its previous policy meeting on June 11, the BOJ said the economy "has been picking up."
The BOJ said it will continue to conduct market operations to increase the monetary base at an annual pace of about 60 trillion to 70 trillion yen under its monetary easing program.
"The bank will continue with quantitative and qualitative monetary easing, aiming to achieve its price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner," it said.