Japan's economy will emerge from a lull toward spring and is certain to pull out of deflation over time, a Bank of Japan policymaker said, offering an upbeat take on the outlook on budding signs of a recovery.
But Hidetoshi Kamezaki, a former trading house executive, said efforts to restore Japan's fiscal health were very important for an economy that is unlikely to see any strong recovery given sluggish domestic demand.
In a speech to business leaders in southern Japan on Wednesday, he also warned of economic risks on the global front that Japanese policymakers could not afford to ignore.
Europe's sovereign debt problem is due to worries about the sustainability of the region's fiscal state. Japan can't dismiss that as someone else's problem, he said.
It needs to find a roadmap to solve this problem before market confidence is lost.
Kamezaki added that Japan's economy was highly likely to return to a gradual recovery path soon, roughly following the BOJ's official line.
It's hard to say with certainty which month it will be. But the economy is likely to escape from a lull toward spring, he told a news conference after his meeting with business leaders.
He offered few clues on monetary policy, saying only that the BOJ needed to be proactive in taking steps to beat deflation.
His comments indicate that additional easing steps will be justified as long as deflation persists, said Seiji Shiraishi, chief economist at HSBC Securities Japan.
The options for the BOJ, however, are limited even if it needs to ease further.
ESCAPE FROM DEFLATION
Japan's economy likely rebounded in the first quarter after an expected slight contraction in the final quarter of last year, as firm demand from Asian nations fuels a pickup in exports.
These encouraging signs prompted the BOJ to forecast an early escape from the doldrums and slightly positive core consumer inflation in the year beginning in April, dampening expectations of an imminent monetary easing.
Given the likelihood of stable long-term inflation expectations and gradual improvement in the supply-demand balance, it is certain that the Japanese economy is heading toward an escape from deflation, Kamezaki said.
Still, he warned of lingering downside risks to the economy, such as uncertainty over the U.S. and European economic outlook, the market fallout from political unrest in Egypt and the chance of a renewed yen rise that could hurt corporate profits.
Kamezaki also said that, while financial markets reacted calmly to Standard and Poor's cut of Japan's sovereign debt rating last week, that was hardly cause for complacency.
As seen in Europe's sovereign debt problem, markets could suddenly turn volatile even when economic and fiscal conditions have not changed much. That's why it's very important for Japan to set a roadmap for restoring its fiscal health while market confidence is maintained, Kamezaki said.
Japanese bond yields have largely shrugged off the S&P downgrade, but increased scrutiny of Japan could be a warning to other rich countries with large budget deficits.
Moody's Investors Service said it would hold a briefing on February 9 on its sovereign ratings, including its rating for Japan, but gave no indication if it would take any action.
Kamezaki has mostly voted with the majority of the BOJ board and toed the bank's official line on monetary policy.
The BOJ last year nudged interest rates effectively to zero, set up a 5 trillion yen ($61 billion) pool of funds to buy assets ranging from government bonds to private debt, and expressed its readiness to top up the fund if the growth outlook worsens.
It also pledged to maintain zero rates unless a pickup in consumer inflation to around 1 percent appeared on the horizon.
Analysts expect the BOJ to stick to zero rates for several years as consumer prices are unlikely to approach that level anytime soon. The BOJ expects Japan to achieve core consumer inflation of 0.3 percent in the year beginning in April and 0.6 percent in the following year.
(Additional reporting by Kaori Kaneko; Editing by Edmund Klamann)