The Bank of Japan is set to raise its economic growth forecasts but cut its rosy inflation outlook next week, sources say, reinforcing expectations it will lag well behind major global central banks in dialing back its massive stimulus programme.
The BOJ is expected to hold off from expanding stimulus at its two-day rate review ending next Thursday, as robust exports and private consumption heighten prospects of a moderate economic expansion.
The central bank`s nine-member board is split between those who expect a strengthening economy to start pushing up inflation, and those who believe inflation will remain subdued well into next year given Japan`s sticky deflationary mindset.
If the pessimists prevail, the BOJ may push back again the timing for hitting its ambitious 2 percent inflation target, sources familiar with its thinking say, in a fresh blow to Governor Haruhiko Kuroda`s radical monetary experiment aimed at putting a sustained end to deflation.
"It`s taking longer than expected for inflation to pick up," one of the sources said. "Sizable cuts in the price forecasts may be inevitable," another source said, adding a delay in the projected timing for hitting the target "can`t be ruled out."
Two other sources expressed a similar view, warning that the underlying weakness in inflation could hamper the BOJ`s efforts to change public perceptions that deflation will persist.
Kuroda is likely to remind markets of the BOJ`s resolve to maintain its ultra-easy policy until inflation is sustainably above 2 percent.
Joachim Fels, global economic adviser at PIMCO, expects the BOJ to maintain its yield targets well into next year.
"The Federal Reserve is exiting, the European Central Bank will taper its bond purchases next year, but I think the yield target in Japan will stay in place for quite some time."STRONG GROWTH, WEAK INFLATION
The BOJ is set to slash its consumer inflation forecast for the year ending in March 2018 to around 1.0 percent from the current 1.4 percent estimate made in April, the sources said.
The central bank is also seen cutting next fiscal year`s inflation forecast to 1.5 percent or below, from the current projection of 1.7 percent, they said.
Depending on how big the cut in next year`s forecast will be, the BOJ may push back the timing for hitting its target from the current estimate of "around fiscal 2018," the sources said.
In a testament to the improving economy, the BOJ will slightly revise up its economic growth forecasts for the current and following fiscal years, the sources said.
The central bank will also offer a more upbeat assessment of the economy than last month to signal its growing conviction that it is expanding moderately, they said. [nL3N1J32XI]
In its current forecasts, the BOJ expects gross domestic product (GDP) to expand 1.6 percent in the current fiscal year and 1.3 percent in the following year.
The disparity between strong growth and low inflation will be a key topic of debate at next week`s rate review, when the BOJ issues its quarterly report with new long-term projections.
The board is divided between those who blame structural factors for keeping inflation weak, and those who feel a tightening job market will soon push up wages and prices.
Some policymakers say companies still have room to cut back on services and streamline operations, instead of luring more employees with higher pay. Only when firms run out of areas to cut costs would they start raising wages and prices, they argue.
The BOJ`s report is likely to offer an analysis on why the strength in the economy hasn`t translated into higher wage and price growth, the sources said.
Japan`s economy grew at an annualised 1.0 percent in the first quarter on solid exports and private consumption.
But core consumer prices in May rose just 0.4 percent from a year earlier, well below the BOJ`s 2 percent target. Tokyo inflation, a leading indicator of nationwide prices, was flat in June from a year earlier, stunning BOJ officials who expected a stronger reading given a recent pick-up in consumption.