"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 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.
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."