BOJ is considering slight inflation forecast upgrade as yen falls

It expects consumer prices to rise by 1.5% in the FY 2017 and by 1.7% in the FY 2018

The Bank of Japan (BOJ) is considering a slight increase in its consumer price forecasts at its next policy meeting as a rapid decline in the yen pushes up import prices, several sources with direct knowledge of the matter told Reuters.

The BOJ currently expects consumer prices to rise by 1.5 per cent in the financial year (FY) 2017 and by 1.7 per cent in the FY 2018, according to forecasts, it issued in November.

Any upgrade is likely to be minor when the BOJ updates its forecasts at a policy meeting on January 30-31, but a recent stabilisation in oil prices and a more healthy global economy are also supportive for Japanese inflation, the sources said.

"This is not just about a weak yen," one source said.

"The global economy has improved from the second half of last year and there has been an adjustment in inventories in emerging markets."

The BOJ will issue a quarterly update of its economic growth and consumer price forecasts at the meeting.

When the BOJ last issued its forecasts at the beginning of November, the dollar was trading around 104 yen.

Since then, the yen has tumbled around 10 per cent due to speculation that US President-elect Donald Trump's policies will spur growth and cause US interest rates to rise quicker than expected.

Signs of a turnaround in Japanese exports and factory production prompted the BOJ to raise its economic outlook last month, highlighting the central bank's growing confidence that the economy will be stronger this year.

If the BOJ does raise its consumer price forecasts, it could send a signal to Japanese companies that they need to continue raising wages, one source said.

BOJ officials have often said publicly that higher wages are essential to meeting its 2 per cent inflation target.

Since the BOJ started its quantitative easing in early 2013 wage gains have been subdued, and few economists are optimistic that the BOJ's 2 per cent price target can be met easily.

Highlighting the difficulty of the task, core consumer prices fell 0.4 per cent in November from a year earlier, down for the ninth consecutive month.

The BOJ currently keeps short-term rates at minus 0.1 per cent and buys government bonds to keep the benchmark 10-year yield around zero.