BOJ likely to cut inflation forecasts, wary of easing-sources

By Leika Kihara and Stanley White

TOKYO (Reuters) - The Bank of Japan is likely to slightly cut next fiscal year's inflation forecast in a quarterly review, sources familiar with its thinking say, but the central bank isn't expected to ease in the near term after having revamped its policy framework only last month.

Many central bank policymakers see little need to expand stimulus any time soon, including at the next two-day rate review concluding on Nov. 1, unless an abrupt yen spike threatens to derail a fragile recovery, the sources said.

Analysts say the BOJ would be in no rush to ease because its new policy framework, which targets interest rates rather than base money, is one better suited for a long-term battle to reach its ambitious 2 percent price goal.

BOJ board member Yutaka Harada told reporters on Wednesday that consumer inflation wasn't accelerating as quickly as he expected, suggesting the central bank will revise down its price forecasts when it issues a quarterly report on the growth and inflation outlook on Nov. 1.

"Job markets continue to improve as a trend so for now, additional easing may not be necessary," said Harada, who has been among the most vocal advocates of aggressive money printing in the nine-member board.

BOJ Governor Haruhiko Kuroda has also said that he saw no immediate need to act, although the central bank stood ready to ease if external shocks threaten achievement of the inflation target.

Under the current forecasts made in July, the BOJ expects core consumer inflation to hit 0.1 percent in the current fiscal year ending in March 2017 and jump to 1.7 percent the following year. The forecast for fiscal 2017 far exceeds private-sector projections of 0.6 percent.

The central bank is likely to slightly cut its price forecasts for both years, the sources said, as a stronger yen pushes down import costs and sluggish consumer spending discourages firms from raising prices of their goods.

"The BOJ has to lower its forecasts, because they are out of line with what most economists outside the BOJ are forecasting," said Norio Miyagawa, senior economist at Mizuho Securities.

"The BOJ is willing to take more time to meet its inflation target, so I don't expect additional easing."

Despite three-and-a-half years of heavy money printing, weak household spending, slumping oil costs and a strong yen weighing on import costs have kept inflation distant from the BOJ's 2 percent goal. Core consumer prices fell 0.5 percent in August from a year earlier to mark the sixth straight month of declines.

The BOJ last month switched its policy target to interest rates from expanding the monetary base after its massive asset purchases failed to generate sustained inflation.

The BOJ's own price index that strips away the impact of fresh food and oil costs, which the central bank flags as a more accurate indicator of price trends, rose just 0.4 percent in August from a year earlier, slowing from 0.5 percent in July.

But a rebound in oil prices has moderated the downward pressure on consumer inflation, which means any downgrade in the BOJ's price forecasts will be fairly small, the sources said.

"The BOJ won't ease just because of a modest downgrade in its inflation forecasts as it probably wants to save its dwindling policy tools for when the yen spikes," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

The Sankei newspaper reported on Thursday that the BOJ will likely reduce its estimate to the lower 1 percent zone from 1.7 percent now for the fiscal year starting in April.

(Additional reporting by Yoshifumi Takemoto, Sumio Ito and Chris Gallagher; Editing by Shri Navaratnam)