The Bank of Japan issued its most optimistic assessment of the country's regional economy in more than eight years on Wednesday, signalling its confidence that a recent increase in coronavirus infections will not derail the country's fragile recovery.

The positive evaluation increases the likelihood that the BoJ would raise its growth and pricing predictions for the fiscal year beginning in April in new projections due next week.

"Japan's economy is improving as a trend, yet it remains in a severe state due to the effects of the coronavirus pandemic," BoJ Governor Haruhiko Kuroda said. 

While growing inflation is welcome progress toward the BoJ's 2% price objective, there is a risk that increased living costs could cool consumption and discourage businesses from hiking prices, putting Japan back into deflation.

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For the first time since October 2013, the central bank increased its economic assessment for all nine regions in a quarterly report on regional Japan. For the first time since the BoJ began issuing the report in 2005, the consumption assessment was also revised up for all nine regions.

"All of the regions stated their economies were picking up or showing indications of picking up as the pandemic's impact on service consumption eased slightly," the BoJ said in the report.

Japan's economy shrank in Q3 of last year as a result of supply constraints and activity restrictions imposed to combat the pandemic, reducing industry output and consumption.

Analysts anticipate that growth will have recovered in October-December and the current quarter as output and consumption pick up, while a recent surge in Omicron infections casts doubt on the outlook.

With inflation still much below the BoJ's objective of 2%, Governor Kuroda is likely to emphasise the central bank's readiness to maintain loose monetary policy.