BOJ cautiously upbeat on regional Japan as divergence widens

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) -The Bank of Japan offered a cautiously optimistic view on the country's regional economies, pointing to divergent trends in areas gaining from robust exports and those still hurt by weak consumption due to the COVID-19 pandemic.

In a quarterly report released on Monday, the BOJ raised its assessment for two of Japan's nine regions including the Kinki western area that is home to big exporters such as Panasonic (OTC:PCRFY).

But it cut its assessment for two regions and left unchanged its view for the remaining five areas, as the pandemic cooled consumer spending and continued to hit the tourism industry.

The assessment reinforces market expectations the BOJ will maintain its aggressive stimulus, but forgo expanding the measures any time soon in the hope that the economy will recover without more support.

"Japan's economy remains in a severe state but is picking up as a trend," Kuroda told a quarterly meeting of the BOJ's regional branch managers on Monday.

The latest assessment on regional Japan will be among factors the BOJ will scrutinise at next week's policy meeting.

The central bank is expected to keep monetary policy steady next week and maintain its view the world's third-largest economy is headed for a recovery, say sources familiar with its thinking.

In fresh quarterly projections due next week, the BOJ may maintain or slightly cut this fiscal year's growth forecast as it weighs the impact of solid exports and the hit to consumption from curbs to combat the virus, they said.

In current forecasts made in April, the BOJ expects the economy to expand 4.0% in the year ending in March 2022.

Given recent rises in oil prices, this fiscal year's consumer inflation forecast may be revised up slightly from the current 0.1%, they said.

The BOJ's branch managers offered a mix bag of positives and risks to the outlook. While some voiced hope a pick-up in the pace of vaccinations will prop up consumption, others saw rising raw material costs as a potential drag on corporate profits.

"Input costs are rising faster than sales prices. If this persists, it could weigh on corporate profits," Hirohide Koguchi, the BOJ's Osaka branch manager, told a briefing.

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