Japanese corporate profits are falling while consumer prices are expected to keep rising due to high oil and food costs, Bank of Japan Governor Masaaki Shirakawa said, underlining the central bank's policy dilemma as it juggles the risks of slowing growth and rising global inflationary
Shirakawa reiterated on Monday that Japan's economic growth was slowing on rising energy and raw material costs, with exports increasing at a slower pace and corporate profits decreasing.
High commodity prices are expected to push up Japanese wholesale and retail prices, he said, adding that the central bank needs to closely monitor the impact of rising raw material costs on the economy.
"Global inflationary risks are intensifying, as seen in the surge in international commodity prices," Shirakawa said in a speech at the quarterly meeting. He added that there is great uncertainty on when the U.S. economy will leave behind its current state of stagnation.
On monetary policy, Shirakawa stuck to the BOJ's official line that the central bank will guide policy flexibly by carefully examining various risks to the economy.
Many economists expect the BOJ to maintain its key target rate at 0.50 percent at least for the rest of this year or later, even as annual core consumer inflation hit a decade-high 1.5 percent in May on soaring energy and food prices.
That is partly because corporate activity, a key driver of growth, is weakening in the face of rising materials costs and a global economic slowdown, putting the Japanese economy's longest postwar expansion cycle at risk.
Confidence among big Japanese manufacturers sank to a five-year low in June, while companies expect profits for the current fiscal year ending in March 2009 to fall for the first time in seven years, the BOJ's tankan business sentiment survey showed last week.
The BOJ branch managers will likely assess how the worsening business climate are affecting regional economies, many of which have already suffered from slack domestic demand.
The central bank will issue a quarterly report on the state of the regional economy at 0530 GMT.
The BOJ has kept monetary policy on hold since raising rates in February last year. It abandoned its tightening bias in April this year on lingering economic uncertainties at home and abroad.