By Leika Kihara
KANAZAWA Japan (Reuters) - Bank of Japan Deputy Governor Kikuo Iwata on Wednesday reiterated policymakers' conviction that the economy can recover from a deep slump, saying that households and companies will boost spending as the pain from an April sales tax hike eases.
Iwata acknowledged that weak exports and the rising burden on households from the tax hike were among risks to the outlook, but said a pick-up in global demand and wages will keep the world's third-largest economy on track for a moderate recovery.
"The recovery in consumption has been patchy ... But taken together, it is gradually recovering. It's not as if household spending is headed for a deep dive," he told a news conference after meeting business leaders in Kanazawa, a city in Ishikawa prefecture in central Japan.
"We're on track to meeting our price target," he said, suggesting that he saw no need to expand monetary stimulus any time soon to ease the pain from the tax hike.
Japan's economy shrank an annualised 7.1 percent in April-June from the previous quarter, the biggest contraction since the global financial crisis in 2009, due to the hit from the sales tax hike in April. That has heightened doubts in markets that the BOJ can accelerate consumer inflation, now around 1.3 percent, toward its 2 percent target next year.
However, Iwata countered the view that wage rises have been slow despite the BOJ's massive monetary stimulus, saying that it takes time for companies - long used to deflation and hesitant to increase wages - to consider raising base salary.
He also disagreed with many analysts that consumer inflation will slow as the boost from the weak yen begins to fade, saying that there was no strong historical co-relation between the yen and price moves.
A weak yen may briefly push up prices by boosting import costs but that alone cannot accelerate inflation in the long run as households, hit by higher prices of imported goods, will withhold spending on other items, Iwata said. As demand weakens for these goods, firms will be forced to cut prices, he added.
"There are various channels under which our monetary policy affects prices, including a narrowing of the output gap," he said, stressing that a tightening job market will lead to higher wages and help the BOJ achieve its inflation goal.
POSITIVE CYCLE INTACT
The BOJ has stood pat since deploying an intense burst of monetary stimulus in April last year, when it pledged to double base money via aggressive asset purchases to achieve its 2 percent inflation target in roughly two years.
Private-sector analysts expect only a modest economic rebound in the current quarter as the tax-hike impact persists, and some of them see the economy barely growing in the current fiscal year ending in March 2015.
The BOJ is much more optimistic on the outlook, however, forecasting in July that the economy will expand 1.0 percent in the current fiscal year. Still, given the soft GDP data, it is likely to cut its projections in late October, sources have told Reuters.
Exports have failed to pick up despite recent yen declines, disappointing policymakers who had hoped rising overseas shipments will support a fragile economic recovery and help offset the post-tax hike slump in domestic demand.
With the dollar having hit a six-year high against the yen this week, some analysts warn that further yen falls may do more harm than good by boosting import costs.
Iwata said a weak yen was still beneficial for exports, but conceded that the currency effect has probably become less influential now than in the late 2000s as many Japanese firms shifted production overseas.
Still, business sentiment has held up despite the delayed export pick-up as many companies saw revenues increase, he said.
"With the positive economic momentum in place for both households and companies, the economy will continue a moderate recovery," Iwata said, toeing the central bank's official view on the outlook.
(Additional reporting by Stanley White in TOKYO; Editing by Chris Gallagher & Shri Navaratnam)