Bank of Japan Gov. Haruhiko Kuroda said on Thursday the economy was starting to pick up and was likely to continue recovering thanks in part to the boost from fiscal and monetary stimulus measures.
While consumer prices will fall for the time being due to the impact of slumping oil prices, they are likely to rebound thereafter as the pandemic's fallout on the economy eases, he said.
"Once the impact of the coronavirus pandemic subsides globally, Japan's economy is likely to continue improving further as overseas economies resume steady growth," Kuroda said in a speech to a quarterly meeting of the BOJ's branch managers.
The upbeat view reinforces market expectations the BOJ will hold off ramping up stimulus for now and focus on pumping money into the economy with existing lending programs.
Kuroda said while Japan's banking system remains stable as a whole, corporate funding conditions remain tight.
"We'll monitor the impact of COVID-19 and won't hesitate to take additional easing measures as needed," he said.
The BOJ upgraded its assessments of eight out of nine regional economies in its quarterly report released after the meeting. Of the nine regions, only Shikoku saw the assessment maintained from the previous report in July.
Although economic conditions remained "severe," many regions reported that their economies "had started to pick up or shown signs of a pickup" as economic activities resumed following suspensions due to the pandemic, the report said.
The BOJ had cut its views on all nine regions for the first and second quarters of the year.
Japan suffered its biggest economic slump on record in the second quarter as the pandemic crippled demand. Analysts expect any rebound to remain modest as fears of infections weigh on consumption.
The BOJ expanded stimulus in March and April by ramping up asset buying and creating a new lending facility to ease corporate funding strains. It has kept policy steady since then.
On Wednesday, Japan raised its economic assessment for August, the first such raise in 15 months, saying downward movements are coming to a halt after a plunge due to the pandemic.
The Cabinet Office's coincident index of business conditions rose 1.1 points from July to 79.4 against the 2015 base of 100, up for the third consecutive month, with the office saying the economy is "bottoming out" in the first upgrade of its evaluation since May last year.
For 12 straight months through July, the government had rated the economy as "worsening," the most pessimistic of its five expressions.
The latest outcome reflected the gradual resumption of economic activity throughout the country since the complete lifting of a state of emergency over the virus in late May.
A government official told reporters that significant improvements in exports, especially of cars, as well as in shipments of industrial goods such as steel helped lift the leading figure, which formally met conditions for revising the assessment upward.
Meanwhile, the official said the pace of the recovery in the coincident index was getting slower, compared with growth of 3.9 points in July and 3.2 points in June. The level also remained low, given that the index stood at 94.1 in February when the virus began to spread in Japan.
"A resurgence in the number of new infection cases seen from the end of July through August is considered to have weakened the recovery momentum," the official said.
The index sank to 71.2 in May, the worst reading since April 2009 when 71.2 was also logged in the aftermath of the 2008 global financial crisis.
The leading index of business conditions, forecasting the situation in the coming months, rose 2.1 points to 88.8 in the reporting month.