BoJ Shirakawa sees Japan economy contraction in Jan-June

TOKYO (Reuters) - Bank of Japan Governor Masaaki Shirakawa said the country's economy will likely shrink in the first half of 2011 due mainly to stalled output in the wake of Japan's March 11 earthquake and tsunami, the Wall Street Journal reported on Saturday.

"We are now expecting production and GDP will decline in the first quarter and the second quarter," Shirakawa said in the interview conducted on Friday, echoing the views of most private-sector economists who also see a first half contraction.

The focus is now on how quickly the Japanese economy will return to growth. This largely depends on when supply chain disruptions will ease and to what degree power shortages could affect factory output during the peak summer period.

Shirakawa was quoted as saying supply constraints would likely continue at least until August before recovering.

"Once supply capacity is recovered, then the Japanese economy is moving back to the original growth path," Shirakawa said in the interview.

The BOJ is expected to hold off on any further easing of monetary policy next week but will likely reiterate its readiness to act if the quake's damage threatens Japan's return to a moderate economic recovery.

In a twice-yearly outlook report to be issued at next week's rate review, the BOJ will cut its economic forecast for the current fiscal year, which began on April 1, from its January projection of 1.6 percent growth to reflect the impact of the quake, sources familiar with the BOJ's thinking have told Reuters.

But many in the bank agree with the dominant market view that Japan will avoid a contraction for the full fiscal year as growth is expected to pick up from around autumn.

(Reporting by Leika Kihara; Editing by Nathan Layne)