BOJ seen keeping policy steady barring big cut in inflation forecast

[TOKYO] The Bank of Japan is expected to hold off on expanding monetary stimulus on Thursday despite trimming its inflation and growth forecasts, clinging to hope that rising wages will spur spending and keep the economic recovery on track.

Japan is emerging from recession but at a snail's pace, as companies remain wary of ramping up spending despite record profits and consumers keep their purse strings tight.

That puts to test the central bank's pledge of hitting its 2 per cent inflation target around the current fiscal year ending in March 2016.

With inflation having ground to a halt due to slumping oil prices, the BOJ is seen slightly cutting its core consumer inflation forecast of 1.0 per cent for this fiscal year in a twice-yearly review of its projections on Thursday.

But the nine-member board is likely to project inflation will hit roughly 2 per cent in the following two years, sources say, allowing the BOJ to justify holding policy steady.

Despite a raft of weak data so far this year, the government appears to be in no mood to pressure the BOJ to do more at this time. Japan's vice economy minister said recently it would "not be a big deal" if the timing for hitting 2 per cent inflation is delayed by oil price falls.

Aides close to premier Shinzo Abe have said further monetary easing could trigger unwelcome falls in the yen that would boost import costs, offsetting the benefits consumers and small firms are enjoying from the falling cost of fuel.

BOJ Governor Haruhiko Kuroda has also voiced confidence his massive stimulus programme was succeeding in cracking the"deflationary mindset" that haunted Japan for 15 years.

"If underlying price dynamics (are) not what we are expecting, then we do not hesitate to adjust or make additional monetary easing. But that is if necessary," Mr Kuroda said earlier this month. "At this stage we don't think it is necessary," he said.

The policy decision, however, could be affected by how much policymakers decide to lower the median inflation forecast.

While the possibility is slim, BOJ policymakers may opt to ease if the cut in this fiscal year's inflation forecast is unexpectedly large or if they feel the slowdown in inflation is damaging enough to warrant pre-emptive action, sources say.

The BOJ surprised markets last October by expanding its asset purchase programme after cutting its forecasts, days after Kuroda had assured parliament that a recovery was on track.

The board may also consider watering down the timeframe for hitting the inflation target.

The BOJ now says Japan will hit the target at or around fiscal 2015, though Mr Kuroda has acknowledged that it may take somewhat longer than that.

Central bankers have stressed that they will look through the effect of lower oil costs, which are largely blamed for inflation evaporating in February.

But consumption has failed to rebound, underscoring doubts held by analysts that inflation will accelerate as quickly as the BOJ projects.

Analysts polled by Reuters expect core consumer inflation to hit 0.3 per cent this fiscal year and 1.3 per cent the following year, barely half the pace projected by the BOJ.

"While additional easing is unlikely to take place this week, we think additional BOJ stimulus is a matter of time," HSBC economist Izumi Devalier said in a research note. "We believe the central bank will announce enhanced easing measures by the end of the second quarter, most likely at the June 19 policy meeting."

REUTERS