July 10, 2017 / 6:07 AM / a month ago

BOJ offers most upbeat view on regional Japan in 12 years

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan June 16, 2017.Toru Hanai

TOKYO (Reuters) - The Bank of Japan offered its most optimistic view of the country's regional economies in more than a decade on solid exports and private consumption, underscoring its conviction a steady recovery is gathering momentum.

But BOJ Governor Haruhiko Kuroda reiterated his resolve to maintain ultra-loose monetary policy until inflation is stably above its 2 percent target, a sign the Japanese central bank will not join its U.S. and European counterparts in dialing back stimulus any time soon.

"Japan's economy is expected to continue expanding moderately ahead," Kuroda told a quarterly meeting of the central bank's regional branch managers on Monday.

In a quarterly report on regional areas of Japan, the BOJ revised up its assessment for five of nine regions and maintained its upbeat view for the remaining four areas.

The report described six regional economies as "expanding moderately" or "moving toward a moderate expansion." It was the first time the BOJ used such strong language for so many regions since it began compiling the report in April 2005.

The upbeat assessment came despite data released earlier on Monday that showed core machinery orders unexpectedly tumbled in May, raising doubts about the economy's strength.

"Capital expenditure continues to increase steadily as a trend," Kimihiro Eto, the BOJ's Osaka branch manager overseeing the western Japan region that is home to big electronics makers, told a news conference.

The report will be among factors the BOJ will scrutinize at next week's rate review, when it will release fresh quarterly growth and inflation projections.

TAKING SOME TIME

In the past two weeks, the European Central Bank, the Bank of England and the Bank of Canada have all switched gears to a more hawkish policy stance, suggesting the era of cheap money is nearing an end. The U.S. Federal Reserve has already raised interest rates twice this year and is seen tightening again before year-end.

For Japan, an exit from stimulus is far off the radar.

All the same, with the economy gaining momentum, Kuroda has a communication challenge on his hands as he tries to convince markets the BOJ has a credible plan to exit ultra-loose policy - without spooking investors that such a move is imminent.

The BOJ will cut its inflation forecasts but hold off expanding stimulus at the July 19-20 meeting, people familiar with the matter say, in another sign the bank is retreating from Kuroda's initial pledge to do whatever it takes to achieve his ambitious inflation target.

Shinichi Uchida, head of the BOJ's Nagoya central Japan branch, said improvements in the economy were gradually prompting companies in the region to raise wages and prices.

"The economy is clearly doing well and there's a shortage of labor but prices aren't rising much. That's because of Japan's sticky deflationary mindset," said Uchida.

"It's taking some time but prices will eventually start rising."

Reporting by Leika Kihara; Editing by Shri Navaratnam and Sam Holmes

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