AP Business Writer
TOKYO (AP) -- Japan's economy has stopped weakening and should show signs of recovery by midyear, the newly appointed central bank governor said Thursday, as weaker-than-expected retail sales for February underscored the challenge he faces in restoring consumer confidence.
"The bank currently assesses that the economy has stopped weakening," Bank of Japan Gov. Haruhiko Kuroda told lawmakers in presenting the bank's semiannual report. But he said there was still "a high degree of uncertainty" about the world's third-largest economy because of the crisis in Europe, the tenuous state of the U.S. recovery and often testy relations with China.
Kuroda has pledged to work with Prime Minister Shinzo Abe's government in achieving a 2 percent inflation target, preferably within two years, and ending years of growth-inhibiting deflation. However, the success of that program will hinge on ensuring that domestic demand is strong enough to spur investment and hiring by companies that are sitting on huge cash reserves.
It also requires moves by the government to cap the country's fast rising public debt -- the largest among advanced industrial nations -- and reassure markets that Japan finances will remain sound, Kuroda stressed.
"To avoid an increase in interest rates on the back of declining confidence in fiscal management, it is also important to take measures aimed at achieving fiscal consolidation in the medium to long term," he said. "We expect the government to take appropriate actions."
Exports, battered by feeble demand in the key U.S. and European markets and by anti-Japanese protests in China, appear to have stopped declining, Kuroda said, while private consumption has remained resilient.
"With regard to the outlook, the pick-up in Japan's economy is expected to become more evident around mid-2013," he said.
However, data from the Ministry of Economy, Trade and Industry, released Thursday, showed retail sales falling 2.3 percent from a year earlier in February, worse than the 1.2 percent drop forecast by most analysts. Sales rose 1.6 percent from the month before.
By boosting inflation, Japan's planners hope to persuade consumers to spend more now in anticipation of price increases in the future. That could prove a daunting challenge given a drop in real wages over the past two decades and a weak job market, said Susumu Takahashi, head of the Japan Research Institute and a member of a government economic advisory council.
The only way to achieve the inflation target within two years, he said, was to change expectations.
"The only way is for the deflationary way of thinking to change. Without that it will be very hard," he said.
After taking power late last year, Abe's administration embarked on an aggressive stimulus program of government spending, monetary easing and planned reforms aimed at improving Japan's competitiveness. Revised figures show Japan's economy likely emerged from a recession late last year, but other data has been mixed.
Kuroda said prices are unlikely to rise for the next few months but after that Japan would see some progress toward its inflation target as the economy moved toward a "moderate recovery path."
The central bank asset purchases and other strategies adopted so far have not been sufficient to reach the inflation target, he said, reiterating his intention to manage market expectations and "make clear that we have adopted the uncompromising stance that we will do whatever is necessary to overcome deflation."
Kuroda was appointed to succeed former BOJ governor Masaaki Shirakawa when he stepped down on March 19, three weeks before his term expired. The parliament is expected to approve his appointment to the five-year term, which is due to begin April 8.
The central bank is due to hold its first regular policy meeting under Kuroda April 3-4, when it may further boost its purchases of government bonds to help increase the amount of money available in the economy and encourage more investment by the private sector.
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