TOKYO Bank of Japan Governor Masaaki Shirakawa said on Tuesday the central bank will continue with powerful monetary easing as the economy is likely to remain weak for the time being.
Shirakawa stuck to the central bank's view that the economy will eventually resume a moderate recovery as overseas growth gradually emerges from a slowdown, helped in part by resilience in domestic demand.
But he warned that the outlook remained highly uncertain, pointing to risks such as a continued slowdown in overseas growth and a diplomatic row with China that has hurt sales in one of its biggest export markets.
"Exports and factory output are declining as overseas economic growth continues to slow," he told a quarterly meeting of the central bank's regional branch managers.
The BOJ is under intense pressure from Prime Minister Shinzo Abe, whose party surged to power in a lower house election in December last year, to take bolder action to beat deflation.
The central bank, which eased policy five times in 2012, will thus consider expanding stimulus again and double its inflation target to 2 percent this month, sources have told Reuters.
The world's third largest economy slipped into a shallow technical recession, defined as two consecutive quarters of contraction, that many analysts believe began in the first half of 2012.
Many analysts expect the economy to emerge from recession by mid-year, although Japan has been waging a long battle to escape deflation that has plagued the country for nearly two decades.
A Reuters poll in December produced a median forecast for Japan's economy to contract 0.1 percent between October and December before growing 0.4 percent in the January-March quarter to end the 2012/13 fiscal year with 1.0 percent growth.
A survey by Markit/JMMA showed manufacturing activity contracted in December at the fastest pace in more than three years as companies focused on drawing down inventories due to the recession at home and weak demand abroad.
Shirakawa warned that manufacturers' business sentiment was worsening and capital expenditure was weakening, reflecting declines in exports and output.
But Japan's exporters may benefit from a weakening yen, which boosts the competitiveness of their goods sold abroad.
Tokyo's Nikkei stock average climbed 1 percent to a 32-month high on Tuesday, as persistent weakness in the yen was seen helping Japan's big export names.
(Reporting by Leika Kihara; Editing by Edwina Gibbs and Simon Cameron-Moore)