By Leika Kihara
TOKYO (Reuters) - The Bank of Japan will likely trim this year's economic growth forecast in July but project inflation will stay around its 2% target in coming years, sources said, keeping alive the chance of an interest rate hike this month.
The central bank will release fresh quarterly growth and price forecasts at its next policy meeting on July 30-31, and debate whether to raise rates from current near-zero levels.
A rare unscheduled downgrade to Japan's historical gross domestic product (GDP) data will likely lead to a slight cut to the BOJ's growth forecast for the current fiscal year, said three sources familiar with its thinking.
But the central bank will likely make no big changes to its fiscal 2025 and 2026 GDP forecasts, and stick to its view that the economy remains on track for a moderate recovery, they said.
In its latest forecasts made in April, the BOJ expected the economy to grow 0.8% in the current year ending in March 2025, before expanding to 1.0% in both fiscal 2025 and 2026.
Inflation, as measured by an index excluding fresh food and energy costs, had been expected to hit 1.9% in 2024 and 2025, and accelerate to 2.1% in 2026.
"The GDP downgrade is something of the past that doesn't affect the BOJ's economic assessment much," one of the sources said, a view echoed by another source. "All in all, things are on track," the first source said.
The BOJ will also roughly maintain its forecast that inflation will stay around its 2% target in the years through early 2027, they said.
"There hasn't been much data requiring the BOJ to change its view on the broader price trend," a third source said.
The sources spoke on condition of anonymity due to the sensitivity of the matter.
Such a forecast would help the BOJ make the case for a near-term interest rate hike, as Governor Kazuo Ueda has said the bank will hike rates if there is more conviction that inflation will durably hit its 2% target.
CONSUMPTION WEAK SPOT
A survey by Japan Center for Economic Research released on Tuesday showed economists expect GDP growth of 0.44% this fiscal year, down from a 0.62% forecast made in the previous survey conducted before rare GDP revision on July 1.
The BOJ ended negative interest rates in March. In the next move toward policy normalisation, the BOJ will lay out this month a plan on how to taper its huge bond buying.
Markets expect the BOJ to hike rates again this year, but are divided whether it will happen this month or later.
Analysts betting that the BOJ will hold fire this month point to recent weak signs in consumption. Household spending unexpectedly fell in May as higher prices continued to squeeze consumers' purchasing power.
While analysts expect real wages to turn positive in coming months, the yen's renewed declines are pushing up import costs and may keep households' living costs high.
The BOJ's branch managers said on Monday wage hikes were broadening across the economy and consumption was "firm as a whole," signalling the bank's confidence that rising income will boost household spending in coming months.
Former top BOJ economist Seisaku Kameda, who expects the central bank to keep rates steady in July, said the BOJ probably wants more evidence that average base pay - which hit a 31-year high of 2.5% in May - keeps rising in coming months.
"Japan's economy isn't in very good shape with consumption and output essentially flat. But it's not falling off the cliff either," said Kameda, who now serves as an economist at a think tank affiliated with Japan's Sompo holdings.
"The BOJ's current projections are already quite optimistic, so it might feel compelled to spend more time confirming whether wages and service inflation will rise as much as it projects."