Creeping signs of deflation overshadow BOJ's optimism on economy

The Bank of Japan has maintained its optimistic economic view on most of the country's nine regions but said some firms are struggling to raise prices due to weak consumption, underscoring the difficulty of removing the public's sticky deflationary mindset.

The hit to exports from a strong yen also forced the central bank to cut for the first time in nearly four years its view on the Tokai region - home to auto giant Toyota Motor Corp and a key driver of the world's third-largest economy.

BOJ Governor Haruhiko Kuroda maintained his optimism, telling Monday's quarterly meeting of the bank's regional branch managers that the economy continues to recover moderately.

But the lingering weakness in consumption suggests that more than three years of massive money printing has yet to nudge firms into raising prices, which has been one of the key objectives of the BOJ's stimulus programme.

"An increasing number of companies are starting to feel that prices may not rise much ahead. That's affecting price-setting behaviour particularly among supermarkets," Atsushi Miyanoya, the BOJ's branch manager overseeing the Kinki western Japan region, told a news conference.

In a quarterly report issued on Monday, the BOJ maintained its assessment for six areas to say their economies continued to recover moderately. It raised its view for two regions.

But it revised down its assessment for the Tokai area for the first time since January 2013, saying its economic expansion was moderating. In its July report, the BOJ said the area's economy was expanding moderately as a trend.

"Households are worried that wages may not rise much when they see corporate profits fall due to the strong yen," said Kimihiro Eto, the BOJ's branch manager overseeing the region.

"If they have a choice, consumers are choosing something cheaper. They're becoming more mindful of costs," he said.

Monday's report will be among factors the BOJ's board will scrutinise at its rate review on Oct 31-Nov 1, when it will issue fresh quarterly growth and inflation forecasts.

The BOJ is likely to cut next fiscal year's inflation forecast slightly in the new projections, sources familiar with its thinking say, but is seen holding off on expanding stimulus after having just revamped its policy framework.

The central bank switched its policy target to interest rates from the pace of money printing in September, after years of massive asset purchases failed to jolt the economy out of stagnation and accelerate inflation to its 2 per cent target.

Japanese retailers are struggling with weak sales as flat wage growth eats away at consumer confidence. The nation's core consumer prices slid 0.5 per cent in August from a year earlier to mark the sixth straight month of decline.