Bank of Japan Governor Haruhiko Kuroda on Thursday signaled his support for a planned two-stage consumption tax rise starting next year, saying it will be "extremely difficult" for the central bank to deal with a potential fall in government bond prices if the government postpones the hike.
Kuroda expressed the view after the central bank upgraded its assessment of the Japanese economy for the first time in two months, stating it "is recovering moderately" on the back of a revival in corporate spending and solid consumer spending amid improving employment and income conditions.
It was the first time since autumn 2008 that the BOJ has used the term "recovering" in describing the state of the nation's economy.
In a two-day meeting through Thursday, the central bank's nine-member Policy Board decided unanimously to maintain its large-scale monetary easing policy centering on doubling the monetary base and boosting purchases of government bonds to achieve a 2 percent inflation target in about two years.
Looking ahead, the BOJ said the world's third-largest economy "is expected to continue a moderate recovery" as consumer prices are likely to register a gradual increase on a year-on-year basis.
Speaking to journalists after the meeting, Kuroda said that even if the consumption tax is raised as scheduled, the government and the central bank can employ their respective fiscal and monetary policy tools to bolster the economy.
Under the plan, the government will raise the tax rate from the current 5 percent to 8 percent in April next year and to 10 percent in October 2015.
The governor, however, said it will be "extremely difficult" for the BOJ to deal with a potential fall in government bond prices if the nation's fiscal credibility is undermined as a result of a postponement to the sales tax hike.
The government needs to carefully consider both the risks of conducting the tax hike as planned and postponing it, he said.
Prime Minister Shinzo Abe has said he will decide on whether to implement the planned sales tax hike after examining economic data including the results of the BOJ's Tankan business sentiment survey due out Oct. 1.
Meanwhile, Kuroda expressed confidence in the economy, saying improvements in income and employment are increasing household spending. Consumer prices are rising gradually as expected, he said.
"A positive circulation mechanism (involving production, income and spending) is taking hold in both households and companies," he said, referring to corporate capital spending.
Capital spending by Japanese companies increased for the first time in three quarters in the April-June period amid a weakening yen and higher stock prices, according to government data released earlier this week.
Regarding income, the average total salary, including overtime money, paid to workers in July rose for the second straight month due to increases in summer bonuses and overtime payments, while basic wages fell for the 14th consecutive month.
Last week, the government said consumer prices in July rose 0.7 percent from a year earlier, marking the highest rise since November 2008. Employment conditions show signs of improvement as Japan's job availability recovered in July to its best level in more than five years, helping the unemployment rate fall.
On overseas economies, Kuroda said uncertainty remains over the eurozone's debt problems, emerging and commodity-exporting economies and the pace of recovery in the U.S. economy, though they are likely to gradually recover as a whole.
The BOJ will fully monitor the effects of the growing tensions over Syria on global financial markets such as rising crude oil prices, he said.