The Bank of Japan offered a bleaker view on exports and output a week before data is expected to show the biggest contraction in economic activity since the global financial crisis, heightening concerns a rebound may be delayed and increase pressure for further monetary easing.

But BOJ governor Haruhiko Kuroda remained upbeat about the outlook for the world’s third-biggest economy, underscoring the central bank’s conviction that no fresh near-term stimulus is required to shake off the effects of a sales tax hike in April.

“Japan’s economy is likely to continue recovering moderately with the effect (of an April sales tax increase) seen gradually subsiding,” Kuroda told a news conference yesterday.

“Exports and output have been weakening,” he said. “But a positive economic cycle remains in place as job and income conditions steadily improve.”

Kuroda said exports are set to recover as US and Chinese growth picks up, adding that geo-political risks, such as escalating tensions in Ukraine, will not force the BOJ to alter its upbeat outlook of the global economy at least for now.

He also said Japan’s economy was likely to expand above its potential, deemed at around 0.5 per cent or lower, in the current fiscal year from April despite an expected contraction in the April-June quarter blamed on the tax hike.

“The output gap will continue to narrow, so inflation will accelerate from around the latter half of the current fiscal year,” Kuroda said, stressing that Japan is on track to hit the bank’s 2 per cent inflation target some time next year.

Some analysts, however, remained unconvinced given exports have so far failed to offset the hit from the tax hike.

“Kuroda sounded bullish on prices, but he didn’t explain what mechanism could see prices rise while economic growth slows,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

“If consumer inflation fails to pick up pace from later this year towards 2 percent next year, the BOJ would come under pressure for further easing,” she said, adding that the bank may ease policy again in October.

The BOJ downgraded its assessment of exports - which it has been counting on to support the economy as the tax hike crimps consumption. “Exports have shown some weakness,” the bank said, revising last month’s assessment they were moving sideways.

It also acknowledged “some weakness” in industrial output.

As widely expected, the BOJ maintained its policy framework, under which it has pledged to increase base money by 60-70 trillion yen per year through aggressive asset purchases to reflate the moribund economy.

Exports unexpectedly fell in June for a second straight month and output plunged at the fastest pace since the March 2011 earthquake, casting doubt on the BOJ’s view the economy will fairly quickly ride out the pain from the April 1 sales tax hike to 8 per cent from 5 per cent.

Adding to the gloom, the Nikkei share average slumped to a two-month low yesterday, suffering its biggest daily decline in five months as investors were gripped with fear that geopolitical crises in Ukraine and the Middle East could disrupt global growth.

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