BOJ chief economist says Japan likely to shift to expansionary phase this fiscal year

TOKYO (Reuters) - Japan's economy is likely to shift to an expansionary phase this fiscal year due to improvements in domestic demand, exports and a windfall from last year's decline in oil prices, the Bank of Japan's chief economist said.

Japan can continue to exceed its potential growth rate, which is from zero to 0.5 per cent, as household spending and consumer sentiment improve, according to Eiji Maeda, head of the research and statistics department at the BOJ.

"The output gap has returned to its 10-year average and could rise above the average," Maeda said at a seminar. "I expect the economy to move from recovery to an expansionary phase."

Data due this week is likely to confirm that Japan is still slowly recovering from a surprise recession last year, and if growth fails to pick up policymakers could come under pressure to take steps to stimulate the economy.

Japan's economy is expected to have grown 0.4 per cent in January-March, unchanged from the prior quarter, according to a Reuters poll of economists. The Cabinet Office will release the data on Wednesday.

Some economists are worried that growth may not accelerate as data on consumer spending was lacklustre at the start of this year.

Maeda was more optimistic, however, noting that some measures of retail sales have recently shown signs of strength and that the housing market is starting to pick up.

Falling oil prices will also shave more than 10 trillion yen (S$110.57 billion) from Japan's energy import bill, which is larger than an 8 trillion yen hit inflected by a sales tax increase last year, he said.

Chinese officials will be able to manage their slowing economy, but other overseas economies could pose downside risks to Japan's outlook, Maeda said.

The BOJ also holds a two-day meeting ending Friday. Last month the central bank pushed back the timing for meeting its goal of 2 per cent inflation, but BOJ Governor Haruhiko Kuroda has said he does not see the need to easy policy further.

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