Central bank upbeat about economy's 'moderate' recovery

Deflation remains firmly entrenched in Japan, the latest figures showed on Friday, despite optimistic forecasts from the central bank, highlighting that there are no quick fixes for one of the world's largest economies.

Deflation remains firmly entrenched in Japan, the latest figures showed on Friday, despite optimistic forecasts from the central bank, highlighting that there are no quick fixes for one of the world's largest economies.

Prime Minister Shinzo Abe has made the fight against deflation - the damaging decline in prices, profits and wages that has dogged Japan for most of the past 15 years - a central tenet of his economic policy. On his urging, the central bank committed to a target of 2 per cent annual inflation, considered healthy by many economists. On Friday, the central bank, the Bank of Japan, under its new governor, Haruhiko Kuroda, put a date on that target: 2015 or early 2016.

"Various indicators are showing signs that inflation expectations are heightening as a trend," Mr Kuroda said on Friday, Reuters reported. "Business and household sentiment is improving."

"Japan's economy has stopped weakening and has shown some signs of picking up," the Bank of Japan said in its economic report. "Looking ahead, it is expected to return to a moderate recovery path around mid-2013." The bank cited a likely improvement in domestic demand as the increased money supply and other economic measures announced take effect.

The central bank also raised its growth forecasts for this year and the next. The bank said the economy would gradually accelerate to 1.6 per cent growth in the fiscal year that ends in March 2016.

The optimistic projections were made as worse than expected economic data for March was released by the statistics bureau. Core consumer prices, which exclude food, fell 0.5 per cent compared with March 2012, the fifth consecutive month of year-on-year declines.

The news added to the doubts of some economists that Japan's grinding deflationary era would end soon. The figure "offered another reminder that deflationary pressures remain strong," Izumi Devalier, Japan economist at HSBC, wrote in a research note. Although a gradual escape from deflation is expected, thanks in part to higher energy prices, she said the inflation rate was unlikely to match what she called the Bank of Japan's "optimistic projections".

Shortly after Mr Kuroda took the top job, the central bank committed to inflating the economy by aggressively doubling its holdings of government bonds in two years.

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