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[TOKYO] The Bank of Japan will project a slight economic contraction for the fiscal year ending in March, but may revise up its forecast for the following year in a quarterly review due later this month, sources familiar with the central bank's thinking told Reuters.
By maintaining its upbeat view on the outlook, central bank officials hope to convince markets that its additional, surprise monetary easing in October was strong enough to keep Japan on track to hit its 2 per cent inflation target.
The BOJ's nine-member board will conduct a quarterly review of its long-term economic and price forecasts at its next rate review on Jan 20-21.
The sources said the BOJ is likely to cut its earlier forecast for economic growth of 0.5 per cent this fiscal year. A sales tax increase in April had nudged Japan into recession.
The board has yet to finalise its estimates. But the sources said the consensus forecast by BOJ officials is unlikely to be much different to private-sector projections for a contraction of around 0.5 per cent.
Many central bankers expect economic growth to beat their forecasts in the next fiscal year, as falling oil prices increase households' disposable income, and a stimulus package prepared by the government helps underpin growth.
Consequently, the BOJ is seen revising up slightly its projection for 1.5 per cent growth in the 2015/16 fiscal year, the sources said.
A Reuters poll in December showed economists expect the economy to contract 0.6 per cent in the current fiscal year but expand 1.6 per cent in the next business year.
The BOJ eased monetary policy in October to prevent slumping oil prices and weak household spending from delaying the achievement of its 2 per cent inflation target.
But oil prices have continued to fall since then and will likely slow core consumer inflation, which is already below one per cent and likely to near zero in coming months, analysts say.
Reflecting weak oil prices, the BOJ looks increasingly likely to cut its consumer inflation forecast for the next fiscal year, now at 1.7 per cent, sources have told Reuters.
But any cut in the price projection won't automatically trigger further easing, the sources said, as Governor Haruhiko Kuroda has repeatedly said the BOJ won't ease directly in response to oil price falls and will scrutinise whether firms will raise base salary in spring wage negotiations.