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 view that while Japan's economy remains under downward pressure, mainly on output, there are indications it is picking up.
In a sign that the recovery is broadening, the BOJ also raised its assessment for seven out of nine regional economies, with most areas showing a pickup in output and household spending.
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 his speech on Monday.
GLOBAL SLOWDOWN A RISK
The BOJ raised its assessment for seven out of nine regional economies -- including the northeast region hardest hit by the March 11 earthquake -- in a report issued after the branch managers' meeting, citing easing supply constraints and improving household sentiment.
That was a sea change from the previous report in April, when the BOJ cut its assessment for most economies and warned of the widening damage from the March disaster.
Most regions saw production increase or pick up, while household spending improved in all regions as sentiment recovered from the post-quake slump, the July report said.
Auto output in the Tokai region of central Japan, where Toyota Motor Corp <7203.T> is based, will return to pre-quake levels by September and continue to increase from October onward, said Nagoya branch manager Shigeki Kushida.
But the report, which is similar to the U.S. Federal Reserve's Beige Book, added that the pace of the pickup was patchy across regions as some struggle more than others with quake damage.
Japan's economy is experiencing a V-shaped recovery. But it's hard to be upbeat about the prospects after the V-shaped recovery, said Hideo Hayakawa, branch manager for Osaka in western Japan, home to many big electronics manufacturers.
There's a chance global growth will slow by the time supply constraints ease. That may cap Japan's recovery and mean that a V-shaped recovery might not last too long, he said.
The assessments of the regional economies will be taken into account when the central bank next week reviews its long-term economic forecasts that were issued in April.
The BOJ is expected to cut its economic forecast for the current fiscal year that began in April in the quarterly review of its long-term projections, 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.
Many analysts expect Japan's economy to show only flat to slightly positive growth in the current fiscal year. The BOJ's new projection will likely be roughly in line with those expectations, against the 0.6 percent growth forecast it made in April.
(Additional reporting by Rie Ishiguro; Editing by Edmund Klamann)