DAVOS, Switzerland (Reuters) - Bank of Japan Governor Haruhiko Kuroda said on Friday the country's economy is likely to head toward a sustainable growth path as global trade and manufacturing activity pick up.
But he added that Japan had yet to address major challenges, which were to heighten inflation expectations and prod firms to raise wages.
"Our top priority for macro-economic policy continues to be to overcome deflation," Kuroda told a session of the World Economic Forum.
"Firms have remained cautious of wage increases, which is one reason why inflation hasn't been gathering momentum," he said.
Experience with decades of deflation had made inflation expectations among the Japanese public adaptive, or heavily influenced by past and underlying price growth, he added.
Still, Kuroda said Japan's economy was likely to expand 1.5 percent both in the current fiscal year ending in March, and the following year, thanks to a rebound in global demand.
"One notable change since the second half of last year is a global pick-up of manufacturing and trade, which have been sluggish for quite a while since the global financial crisis," Kuroda said.
"Japan's economy has shown clear signs of recovery in exports and industrial production," he said.
Kuroda's optimistic comments on recovery prospects suggest the BOJ will maintain its upbeat economic and price forecasts when its nine-member board conducts a quarterly review of projections on Jan. 30-31.
The growth projections Kuroda offered are higher than the BOJ board's median forecasts of 1.0 percent expansion this fiscal year and 1.3 percent the following year.
It is rare for a BOJ governor to offer specific growth projections that vary from the BOJ board's median forecasts ahead of the quarterly forecast review.
(Reporting by Noah Barkin in Davos and Leika Kihara in Tokyo; Editing by Jacqueline Wong)