Bank of Japan Governor Masaaki Shirakawa said on Friday that the economy was slowing due to rising energy and raw materials costs, but he maintained that it would likely pick up gradually.
Japan has been enjoying its longest cycle of economic recovery in the postwar era, but economists are concerned that deepening troubles in the U.S. economy, surging raw material prices and a higher yen are clouding the outlook.
"Uncertainties over the global economy are heightening in light of sharp rises in international commodity markets and downside risks to the U.S. economy," Shirakawa said in a speech to a meeting of the central bank's branch managers.
U.S. crude oil futures hit an all-time high above $115 per barrel on Thursday amid concerns over supplies.
Shirakawa, who took control of the BOJ on April 9, said international financial markets remain unstable due to the U.S. subprime mortgage woes.
He said that although Japanese financial institutions' losses related to investment in credit products are increasing, they are unlikely to seriously affect the stability of Japan's financial system.
"The BOJ will manage monetary policy appropriately while carefully monitoring the economy and prices and assessing the probability of the (BOJ's) outlook and risks" being realised, he said.
He also echoed the central bank's view that the economy would gradually pick up pace.
The BOJ downgraded its view on the Japanese economy as well as its outlook earlier this month, dropping a phrase used in recent reports that the economy was on a moderate expansion trend.
Shirakawa said core consumer prices, which exclude fresh food products, will likely keep rising compared with a year earlier because overall supply-demand conditions are in balance as prices of oil products and food increase.
The central bank's policy board kept its key interest rate target unchanged at 0.5 percent at its meeting on April 8-9. The BOJ has stood pat on the rate target since February 2007, when it raised it by a quarter percentage point.