By Leika Kihara

TOKYO (Reuters) – Japan’s economy was picking up but any recovery was likely to be modest due to lingering caution over the coronavirus pandemic, Bank of Japan Governor Haruhiko Kuroda warned on Thursday.

The world’s third-largest economy is confronting a resurgence in COVID-19 infections with record cases reported in the western region of Osaka, which has prompted authorities to enforce targeted lockdown measures.

Kuroda said Japan’s economy was likely to improve thanks to a rebound in global demand and the boost from the government’s massive fiscal spending.

“But the pace of the recovery will be modest as caution over the pandemic remains,” he said in a speech to a quarterly meeting of the BOJ’s regional branch managers.

“Services consumption will remain under pressure for the time being due to a resurgence in COVID-19 infections since last autumn,” he said.

Kuroda’s comments suggest the central bank will offer a cautiously optimistic outlook on the economy when it issues fresh quarterly growth projections at this month’s rate review.

Japan’s economy has emerged from last year’s slump caused by the pandemic on support from exports. But slow vaccine rollouts and the renewed surge in COVID-19 cases cloud the outlook for consumption.