The Bank of Japan became more optimistic about the economy for the first time since December because of signs that an export-led recovery is spreading to consumers and service companies.
"Japan's economy continues to recover gradually, and domestic demand is becoming firmer," the central bank said in its monthly economic assessment released in Tokyo yesterday.
"Improvements in business sentiment have been spreading across industries," it said.
Consumers are spending more at retailers including Ito-Yokado Co as a rally in share prices and lower unemployment boost confidence. Executives at large retailers and service companies were the most optimistic in 11 years, the central bank's quarterly Tankan survey showed this month.
Gains in consumer spending, which makes up more than half of the world's second-biggest economy, may help sustain a recovery from the third recession since 1991 as a stronger yen curbs exports and capital spending slows. Another report yesterday showed that machinery orders grew a less-than-expected 4.9 percent in February.
"The focus has shifted from export-related factors to domestic-related factors," said Ryo Hino, an economist at J.P. Morgan Securities Asia Ltd.
"We've had a steady recovery now and that's given time for the spark from exports to permeate the rest of the economy," Hino said.
Central bank Governor Toshihiko Fukui and his eight policy board colleagues kept interest rates at almost zero yesterday and refrained from pumping more money into the economy. The bank left the upper limit of the target for reserves available to lenders at ?35 trillion ($328.8 billion).
Spending by households headed by a salaried worker rose 6.9 percent in February from a year earlier, the biggest gain in 21 years.
Ito-Yokado, Japan's second-largest retailer, said profit rose 15 percent to ?53.6 billion in the year ended Feb. 29 and is forecasting a similar gain this year. Merrill Lynch Japan Securities Ltd and Goldman Sachs Japan Ltd raised their growth forecasts this week, citing a recovery in consumer spending.
Economy Minister Heizo Takenaka said on Sunday that the economy probably grew as much as 3 percent in the fiscal year ending last month, exceeding the government's forecast of a 2 percent expansion made in December, and the 1.2 percent growth recorded in fiscal 2002.
Accelerating economic growth sparked a 47 percent rally in the Nikkei 225 Stock Average last fiscal year, the biggest gain in 31 years. In the past month, retailers such as Ito Yokado have been among the biggest contributors to the Nikkei's gain, alongside machinery makers including Advantest Corp. The Nikkei fell 1.6 percent to 11,897.51 at the 3 pm close of trading in Tokyo.
"Exports have recently increased substantially, and business fixed investment continues its path of recovery," the bank said in its report. "Japan's economy is expected to gain further momentum gradually."
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