By Leika Kihara

TOKYO (Reuters) -Bank of Japan Governor Haruhiko Kuroda said on Wednesday robust profits will help companies ramp up capital expenditure despite the hit to output from supply chain disruptions caused by factory shutdowns in Southeast Asia.

While consumption remains stagnant due to the hit from the coronavirus pandemic, the world’s third-largest economy was picking up as a trend as firm overseas growth underpin exports, Kuroda said.

“Japan’s economy will recover as the impact of COVID-19 wane due to further progress in vaccinations,” Kuroda told an online seminar, adding that a virtuous cycle in the economy will intensify as consumption recovers from the pandemic’s scars.

Kuroda said while inflationary pressures have been weaker in Japan than in the United States and Europe, companies were not resorting to price cuts to lure demand as broadly as during Japan’s two-decades spell of deflation in the late 1990s.

Still, consumer inflation will be well below 2% in 2023, at around “1% or slightly more than 1%,” partly due to temporary factors such as cuts to cellphone fees, Kuroda said.

When excluding such one-off factors, the underlying trend inflation was positive, he added.

“We expect that inflation rate will steadily go up and eventually reach 2% target, although not before 2023,” he said.

“If necessary, we will further relax our monetary policy” such as by cutting interest rates, he added.

On the BOJ’s new climate change scheme, Kuroda said the central bank seeks to avoid any direct involvement in asset allocation, while imposing “some discipline” on banks to ensure their investment helps mitigate climate change.

The BOJ does not exclude green bonds in its existing corporate bond-buying scheme, but will not actively target them either, Kuroda said.

“We will continue with our corporate bond (buying) program and green bonds will be naturally included in programme, but without significant favour or pre-determined weight,” he added.

Under the scheme to be launched this year, the BOJ said it will offer zero-interest loans that can be rolled over until 2030 to banks that boost green and sustainable loans.

It will lay out details of the scheme, such as disclosure requirements for banks to be eligible, either at next week’s rate review or a subsequent meeting in October.

Japan’s economy emerged from last year’s doldrums thanks to robust global demand, though extended state of emergency curbs to combat the pandemic have weighed on consumption.

While the BOJ is set to keep policy steady at next week’s rate review, it is seen warning of heightening risks to exports and output from supply disruptions caused by factory shutdowns in Southeast Asia, sources have told Reuters.

(Reporting by Leika Kihara; Editing by Hugh Lawson and Toby Chopra)

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