[TOKYO] The Bank of Japan is likely to offer a brighter view on factory output than last month at its rate review in February, sources say, underlining its confidence that the economy will emerge steadily from recession without additional monetary stimulus.
With slumping oil prices driving down consumer inflation, however, the central bank may give a slightly bleaker assessment on prices at the two-day rate review that ends on Feb 18, according to sources familiar with its thinking.
Such changes would underscore the divide between the BOJ's optimism over the economic outlook and its gloom over prices as sliding oil prices push consumer inflation further away from its ambitious 2 per cent target.
Factory output rose 1.0 per cent and exports grew the most in a year in December helped by a weak yen and solid car demand in the United States, underscoring the BOJ's view that the economy is headed for a moderate recovery.
The BOJ is thus likely to revise up its view on output from last month, when it said production was "bottoming out," the sources said. That will be in line with the view of the government, which revised up its assessment to say output is"picking up moderately." The BOJ may also revise up its view on exports from last month's assessment that they were "showing signs of picking up,"the sources said, although pessimists in the board may argue against it due to the murky global economic outlook.
The bullish view on the economy contrasts with the headache BOJ policymakers have over the price outlook. Annual core consumer inflation hit 0.5 per cent in December and is set to slow further due largely to the collapse in oil prices.
The BOJ may modify its view that consumer inflation is moving "in a range of 0.5 to 1.0 per cent," to better reflect the recent slowdown in prices, the sources said.
The BOJ is caught in a bind nearly two years into its stimulus experiment, as it further qualifies its inflation goals in response to tumbling oil prices.