Japan's economy is picking up steam but any recovery is likely to be modest due to lingering caution over the coronavirus pandemic, Bank of Japan Governor Haruhiko Kuroda warned on Thursday.
The central bank offered a bleaker assessment than three months ago for two of Japan's nine regions and maintained its view on the remaining areas, signalling cautious optimism on the outlook for the fragile recovery.
The world's third-largest economy is seeing a resurgence in COVID-19 infections, with record cases reported in the western region of Osaka, which has prompted authorities to enforce targeted lockdown measures.
Kuroda said Japan's economy was likely to improve thanks to a rebound in global demand and the boost from the government's massive fiscal spending.
"But the pace of the recovery will be modest as caution over the pandemic remains," he told a meeting of the BOJ's branch managers, warning of continued weakness in service consumption.
In a quarterly report on regional economies, the BOJ revised down its view for two areas largely due to continued weakness in service consumption.
While the assessment for the remaining areas was unchanged, the report highlighted a growing divergence between exporters benefiting from booming global demand, and retailers suffering from the hit to consumption from the pandemic.
"We're seeing a sharp increase in electronic parts orders for data centers, smartphones and personal computers," a parts maker in eastern Japan, was quoted as saying in the report.
Hirohide Kouguchi, head of the BOJ's Osaka branch, said there has recently been 20% less shoppers at department stores and electronics outlets compared with mid-March due to the recent spike in infections.
"We're seeing a widening gap" between robust exports and weak consumption, he told a news conference.
The report will be among factors the BOJ will scrutinise when it issues fresh quarterly growth projections at this month's rate review.
Japan's economy has emerged from last year's slump caused by the pandemic on support from exports. But slow vaccine rollouts and the renewed surge in COVID-19 cases cloud the outlook for consumption.
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