TOKYO (Reuters) - The Bank of Japan mostly held an optimistic view on regional economies, in a sign of its conviction over a broadening recovery but warned that labor shortages and a U.S.-China trade war could cloud the outlook.
The central bank’s assessment in a report on Thursday suggests it will probably maintain its upbeat growth and price forecasts when it conducts a quarterly review of its projections at a rate review on April 26-27.
BOJ Governor Haruhiko Kuroda stressed his resolve to maintain the central bank’s massive stimulus program to achieve his elusive 2 percent inflation target, even as the economy continues to expand moderately.
“With the output gap improving and medium- to long-term inflation expectations seen heightening, we expect inflation to accelerate as a trend and head toward 2 percent,” Kuroda told a quarterly meeting of the BOJ’s regional branch managers on Thursday.
In the report issued by the BOJ’s branch managers, the central bank upgraded its assessment for two of Japan’s nine regions and maintained its rosy view for six areas as a tightening job market drove up household income and consumption.
It described six regional economies as “expanding” or “expanding moderately” - the most upbeat language it uses to describe the state of the economy - and cut its view on just one region.
A senior BOJ official told parliament on Thursday there were promising signs in the economy that would help the central bank meet its price goal.
“Medium- and long-term inflation expectations are recently emerging from weaknesses, while wages and inflation are rising moderately,” said BOJ Executive Director Eiji Maeda.
But the BOJ’s regional report cited some companies complaining that labor shortages - while positive for wages and consumption - were hurting their businesses.
“We have a severe shortage of experienced production line workers,” a steelmaker in Hokkaido, northernmost Japan, was quoted as saying.
“Our pay is relatively high and yet, we’re seeing people quit for other jobs,” said a construction firm in the region.
Yoshitake Matsumoto, the BOJ’s branch manager overseeing the Kyushu southern Japan region, said labor shortages were the primary concern for companies in the area.
“We need to see whether labor shortages could become a bottle-neck for the economic recovery,” Matsumoto told a news conference.
Some companies in the western Kinki region, home to electronic giants such as Panasonic (6752.T), said the trade row between China and the United States was a potential risk to their overseas businesses.
“The trade spat and the strong yen are seen as possible risks,” said Kimihiro Eto, the BOJ’s Osaka branch manager, but added it was uncertain how these risks would affect Japan’s overall economy.
“There could be a real negative impact to external demand, which has been a driver of Japan’s economy, if the U.S.-China trade friction escalates and leads to protectionism on a global scale,” said Eto, who oversees the Kinki region.
Eto, however, said many companies in the western part of Japan did not see the yen’s recent ascent to around 105 to the dollar as severely hurting their profits.
Japan’s economy expanded an annualized 1.6 percent in the October-December quarter, marking the eighth straight quarter of growth, on robust global demand and capital spending.
But core consumer inflation stood at 1.0 percent in February, well below the BOJ’s 2 percent target, as slow wage growth keeps consumers from boosting spending.
Editing by Shri Navaratnam and Jacqueline Wong