TOKYO (AFP) - The Bank of Japan's (BoJ) chief on Thursday stuck by his rosy view of the economy despite mounting evidence that an April sales tax hike has stalled growth.
Mr Haruhiko Kuroda's upbeat take on the world's number three economy has appeared increasingly at odds with the official data, but he brushed off questions about the apparent gap after a meeting where policymakers held fire on launching more stimulus.
"Although there has been a bit of weak data, there is also a favourable cycle of rising income and spending in households and the corporate sector," he told reporters in Tokyo.
"So, the impact of the tax rise and the broader economic trends - excluding the impact of the hike - should be looked at separately."
The April-June quarter saw Japan's economy suffer its deepest contraction since the 2011 quake and tsunami owing to the sales tax hike.
The rise was seen as crucial to chopping a mammoth public debt but economists warned it could derail a budding recovery in an economy beset by years of deflation.
The 1.7 per cent dip in gross domestic product - or a 6.8 per cent contraction at an annualised rate - gave the clearest picture yet of the levy hike's impact, and threw into question Tokyo's plans for another rise next year.
Million of shoppers made a last-minute dash to stores before prices went up on April 1, followed by a slump in spending.
Weak consumer spending and factory output for July point to a tepid third quarter and have dashed hopes for a quick rebound, which boosted speculation that the BoJ would be forced to turn on the monetary easing tap.
"The BoJ's optimism will likely see some severe tests before too long," said Mr Marcel Thieliant from Capital Economics.
"Inflation is likely to fall short of the bank's forecasts by year-end, so a more aggressive pace of purchases may still be required."
- 'Views may change' -
For the past 20 meetings, the BoJ has held off making any major adjustments to an unprecedented stimulus plan launched last year, a cornerstone of Prime Minister Shinzo Abe's wider bid to kick-start the long laggard economy, dubbed Abenomics.
Mr Kuroda has given little indication he will soon increase the BoJ's asset-purchasing stimulus - similar to the Federal Reserve's quantitative easing - saying the impact of the sales tax hike has not been as bad as expected.
"The latter half of this year is going to be crucial... and the BoJ may change its views depending on future developments in the economy," said Mr Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
"But for now I don't think the bank will announce additional easing."
On Thursday, the BoJ acknowledged a decline in the real-estate sector and said factory output has "recently shown some weakness" - a term it also applied to exports.
But it also noted that employment and wage growth were "improving steadily".
"Japan's economy has continued to recover moderately as a trend," it said adding the tax hike's impact would "wane gradually", echoing its earlier statements.
However, the BoJ has lowered its growth forecast for the current fiscal year to March to 1.0 per cent, well down from a 1.5 per cent prediction in late 2013.
Mr Kuroda on Thursday repeated his support for Tokyo's tentative plans to raise the sales tax again to 10 per cent from the current 8.0 per cent, saying that failing to lift rates could see a plunge in investors' confidence over Japan's ability to meet its huge debt obligations.
"If taxes go up, the government and the BoJ have measures to address (a downturn), but if it's called off, we have no measures" to deal with a resulting crisis on bond markets, he said.