• Reuters, Kyodo

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Japan's economy has been picking up but any recovery is likely to be modest due to lingering caution over the COVID-19 pandemic, Bank of Japan Gov. Haruhiko Kuroda warned on Thursday.

The world's third-largest economy is confronting a resurgence in infections with the virus, with record cases reported in Osaka Prefecture, prompting authorities to enforce stricter measures against its spread.

Kuroda said the nation's economy was likely to improve, thanks to a rebound in global demand and the boost from the government's massive fiscal spending.

"But the pace of the recovery will be modest as caution over the pandemic remains," he said in a speech to a quarterly meeting of the BOJ's regional branch managers. "Services consumption will remain under pressure for the time being due to a resurgence in COVID-19 infections since last autumn," he said.

In its quarterly Sakura report, the BOJ maintained its economic assessments on seven of the country's nine regions, while two areas saw downgrades — a sign that recovery from the coronavirus pandemic remains fragile and patchy.

The report said the economy remained in a severe situation due to the pandemic but had been "on a pickup trend" or has "started to pick up" in many regions in the nation, in line with the view expressed by Kuroda.

The view on Hokkaido was rather pessimistic as the economy was "more or less flat," after the BOJ said in its previous report that the pace of pickup was slowing. Tohoku also saw a downgrade.

Kuroda pointed to difficulties faced by companies in raising funds, even under the BOJ's accommodative monetary policy, saying the bank would not hesitate to take additional easing steps if needed.

His comments suggest the central bank will offer a cautiously optimistic outlook on the economy when it issues fresh quarterly growth projections at this month's rate review.

Japan's economy has emerged from last year's slump, caused by the pandemic, on support from exports. But slow vaccine rollouts and the renewed surge in COVID-19 cases cloud the outlook for consumption.

In the previous policy-setting meeting in March, the BOJ tweaked its policy framework to prepare for protracted monetary easing as the pandemic drags on, with the bank's 2% inflation target remaining elusive.

The BOJ is seeking to keep both short-term and long-term interest rates low and stable to support the economy under a program called "yield curve control," but now allows a greater fluctuation in 10-year Japanese government bond yields.

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