By Leika Kihara
TOKYO (Reuters) - The Bank of Japan is set to paint a brighter picture of the economy on Thursday but cut its inflation forecasts again, reinforcing expectations that it will lag well behind major global central banks in scaling back its massive stimulus program.
With robust exports and private consumption pointing to a steady though modest economic recovery, the Japanese central bank is expected to hold off from expanding stimulus at its two-day rate review that ends on Thursday.
But stubbornly weak price growth will likely force the BOJ to cut its inflation forecasts, sources say, underscoring the challenges the central bank faces as it tries to reflate the economy and coax consumers into spending more.
Depending on how deep the cuts are, the BOJ may push back the timing for hitting its 2 percent inflation target, the sources say, in a flesh blow to Governor Haruhiko Kuroda's radical monetary experiment aimed at sustainably ending deflation.
If so, it would be the sixth time the BOJ has pushed back the target, now projected at around March 2019, since Kuroda deployed his huge asset-buying program in 2013.
Still, the BOJ is likely to stress that there is no need to ease policy now as a strengthening recovery eventually will boost consumption and encourage firms to raise prices and wages.
With inflation still distant from its target and its policy ammunition dwindling, the BOJ won't ease just to quicken the timing for hitting its price goal, say sources familiar with its thinking.
"The BOJ will probably stick to its rosy view that inflation will accelerate ahead as a tightening job market gradually push up wages," said Izuru Kato, chief economist at Totan Research.
"Otherwise, the BOJ would find it hard to justify standing pat on policy."
The BOJ is expected to maintain its short-term interest rate target of minus 0.1 percent and its 10-year government bond yield target of around zero percent.
GROWTH, PRICE MISMATCH
At his post-meeting news conference (0630 GMT), Kuroda is likely to remind markets of the BOJ's resolve to maintain ultra-easy policy until inflation is sustainably above target.
That would put the BOJ far behind the U.S. Federal Reserve, which has been gently raising rates and is expected to announce detailed plans in September to start shrinking its more than $4 trillion balance sheet.
The European Central Bank (ECB) is also expected to announce plans in coming months to taper its asset purchases as growth picks up on the continent, according to a Reuters poll.[ECB/INT]
To be sure, the disparity between robust growth and weak inflation is not a dilemma unique to Japan. But the BOJ will seek to explain why the divergence is so pronounced in the world's third-largest economy in a quarterly report reviewing its long-term projections.
In a testament to the improving economy, the BOJ will slightly revise up its growth projections and offer a more upbeat assessment of the economy than last month.
But it is set to slash its consumer inflation forecasts for the year ending in March 2018 and the following year, sources have told Reuters.
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.