By Leika Kihara and Kaori Kaneko
NARA/TOKYO, Japan (Reuters) - Bank of Japan board member Seiji Nakamura said solid global growth will help Japan's recovery accelerate later this year but warned that the country cannot afford policy paralysis when the wounds of the devastating earthquake in March have yet to heal.
Prime Minister Naoto Kan survived a no-confidence vote in parliament on Thursday after he offered to resign, probably in autumn, but the unpopular leader will still struggle to break a policy deadlock given a split in his own party and a divided parliament.
The political turmoil clouds the outlook for an economy that was knocked back into recession by the disaster, as supply chain disruptions and power shortages hit output and exports.
"Japan cannot allow, and does not have room, for an interruption of policy or paralysis when it needs to deal with the aftermath of the earthquake and the Fukushima nuclear disaster," Nakamura told reporters after meeting business leaders on Thursday in Nara, western Japan.
Nakamura said consumer sentiment appeared to be picking up and households were now more willing to spend than they were immediately after the disaster, while companies were gradually restoring output to pre-quake levels.
"Japan's economic recovery is expected to accelerate toward the latter half of the current fiscal year," Nakamura said.
He was unfazed by signs of a slowdown in global factory growth, saying the world recovery was on track and would help Japanese exports rebound in the autumn.
His comments underscore the dominant market view that the Bank of Japan will hold off on easing monetary policy further in the short run, unless a renewed spike in the yen or steep falls in stock prices severely hurt sentiment.
Nakamura was cautious about expanding the central bank's loan scheme targeting growth industries despite its cumulative lending commitment nearing a 3 trillion yen ($37 billion) cap, suggesting there was no consensus within the board yet on whether to boost the program this month.
NO CONSENSUS ON LOAN SCHEME
The 9.0 magnitude quake and a deadly tsunami that struck Japan's northeast left around 24,000 dead or missing and triggered the world's worst nuclear crisis in 25 years, pushing Japan into its second recession in less than three years.
The BOJ eased monetary policy just days after the earthquake but has stood pat since then on the view the economy will resume a moderate recovery before the end of the year, fueled in part by reconstruction.
It has signaled, however, that it stands ready to loosen policy further if the damage from the quake proves greater than expected and hits domestic demand.
Data released on Thursday showed Japanese companies raised spending on plant and equipment in January-March at roughly the same annual rate as in the previous quarter, suggesting that the economy may have contracted less in the first quarter than initially reported.
The capital spending figures will be used to calculate revised gross domestic product (GDP) figures for the first quarter, due on June 9. Analysts expect the capital spending data to contribute to a slight upward revision.
With interest rates virtually at zero and with few tools left to bolster the economy, one option for the BOJ as it seeks ways to support post-quake reconstruction may be to expand the loan scheme targeting high-growth sectors.
Sources familiar with the BOJ's thinking have said the central bank will consider boosting the scheme, under which it offers cheap loans to commercial banks that lend to companies with growth potential, as early as its next rate review in June.
But Nakamura said he was against an expansion without addressing the program's drawbacks. Some in the banking industry have said the scheme was crowding out investment opportunities for private financial institutions and squeezing their profit margins.
Nakamura also warned that while markets can absorb any additional bond issuance to pay for post-quake reconstruction, there was no room for complacency given Japan's severe fiscal state.
"Markets might suddenly turn against us unless Japan comes up with a roadmap for fiscal reform while market trust (in JGBs) still remains. Japan is not off the hook just because interest rates are low," he said.
A former shipping industry executive who joined the BOJ in 2007, Nakamura has mostly voted with the majority of the board and toed the central bank's official line on policy.
($1 = 80.915 Japanese Yen)
(Editing by Kim Coghill)