By Leika Kihara and Stanley White
TOKYO (Reuters) – Bank of Japan Governor Haruhiko Kuroda said the economy was gradually emerging from recession, but he acknowledged last year’s sale tax hike dealt a bigger blow on growth than initially expected.
“It’s true the effect of (last April’s sales) tax hike was bigger than expected,” Kuroda told parliament on Wednesday.
“But economic growth is turning positive and the pressure on prices will disappear from April,” he said, adding that the economy is sustaining positive momentum spurred by the central bank’s massive stimulus program launched in 2013.
Japan’s economy emerged from recession caused in part by last April’s sales tax hike to 8 percent from 5 percent, though private consumption has lacked momentum as wage growth has failed to catch up with the rising cost of living.
In a glimmer of hope, however, data on Wednesday showed Japan’s service sector sentiment improved for the fifth straight month in April as consumers began to feel the benefits of rising wages and bonuses.
An index measuring the outlook also improved for the fifth straight month, with some retailers pointing to booming consumption from tourists visiting from overseas.
The world’s third-biggest economy was expected to post a second straight quarter of moderate growth in January-March, a Reuters poll showed, pointing to a steady recovery from the tax hit.
The BOJ kept monetary policy steady last month even as it cut its price forecasts as slumping oil costs and soft consumption ground inflation to a halt, pushing it further away from the bank’s ambitious 2 percent target.
Kuroda repeated the BOJ’s view that Japan is likely to see inflation hit 2 percent around the first half of next fiscal year, which begins in April 2016, as the economy continues to recover moderately.
“Slack in the economy has mostly disappeared,” he said.
Kuroda, a former finance ministry bureaucrat, also repeated the need for Japan to take steps to fix its tattered finances.
But he toned down his calls for Japan to retain tax hikes as among key tools to restore Japan’s fiscal state, saying that it was up to the government and parliament to decide what mix of measures would best reduce the country’s huge public debt.
Kuroda caused a stir among pro-growth aides of premier Shinzo Abe last year by calling on the government to proceed with a scheduled second sales tax hike in October 2014.
Abe eventually postponed the tax hike by 18 months to April 2017, mainly influenced by the first tax hike’s massive hit to the economy.
(Editing by Chris Gallagher & Shri Navaratnam)