Bank of Japan Governor Masaaki Shirakawa said the world economy continues to recover albeit at a slower pace, taking a slightly more cautious view on global growth as signs of a slowdown spread to emerging economies.
But he maintained the central bank's assessment that while Japan's economy remains under downward pressure, mainly on output, it is showing signs of picking up.
Japan's economy will likely resume a moderate recovery as supply constraints ease further and output activity picks up, Shirakawa said in a speech to a quarterly meeting of BOJ branch managers on Monday.
The BOJ is growing increasingly confident that Japan's economy will recover from the devastation of the March 11 earthquake and tsunami by the end of this year as companies restore supply chains more quickly than expected.
Factory output in May jumped by the most in almost 60 years, while the central bank's latest quarterly tankan survey showed that companies expect an improvement in business sentiment in coming months and plan to increase capital expenditure.
The BOJ is therefore expected to hold off on easing policy further at its rate review next week and to tone up its optimism on output and the economy, although it will strike a note of caution about signs of a global slowdown.
Some in the BOJ have become increasingly worried about softening global growth which, if prolonged, will hurt exports just when Japan is shaking off supply constraints in the autumn.
Shirakawa's acknowledgement of the global slowdown follows a warning by BOJ board member Yoshihisa Morimoto last month that global economic risks have heightened somewhat after a slew of weak U.S. data.
But many in the central bank still do not expect the global slowdown to turn into a recession that would hurt exports severely enough to threaten Japan's recovery.
Output and private domestic demand are showing signs of picking up, as supply constraints start to ease and household and business sentiment improve somewhat, Shirakawa said in the speech on Monday.
The BOJ is expected to cut its economic forecast for the current fiscal year that began in April when it conducts a quarterly review of its long-term projections at next week's rate review, sources familiar with the bank's thinking said.
But this would be a technical revision reflecting the steep contraction in January-March GDP and revisions to last year's figures, and would not affect monetary policy or the BOJ's view that growth will pick up toward the end of this year, they said.
(Editing by Edmund Klamann)