RPT-PREVIEW-BOJ set to hold fire, stick to recovery view

(Repeats with no change in text)

* What: Two-day Bank of Japan meeting

* When: Jan 24-25, decision expected 0330-0500 GMT Jan 25

* Rates seen on hold at 0-0.1 pct, new policy steps unlikely

* BOJ likely to revise up GDP forecast for year ending March

* No major change in BOJ view deflation to ease gradually (Adds comment by BOJ's top economist)

By Leika Kihara

TOKYO, Jan 19 (Reuters) - The Bank of Japan is expected to tweak slightly its growth forecasts next week while keeping monetary policy on hold and sticking to its view that firm demand in Asia will pull the economy out of stagnation in few months' time.

Some encouraging signs, such as a rise in factory output, will for now allow the central bank to refrain from easing its policy further through an increase of its asset purchases.

BOJ policymakers instead will focus on the question how recent commodity price increases and growing optimism over the U.S. economic recovery could affect its long-term economic outlook.

The central bank issues long-term growth forecasts in April and October, and reviews them in January and July.

Here are possible outcomes of the Jan. 24-25 policy review.

NO NEW POLICY STEPS, UNCHANGED ECONOMIC OUTLOOK

POSSIBILITY: HIGHLY LIKELY

Output is holding up well despite the September expiry of government incentives for buyers of low-emission cars, backing the BOJ's view that Japan will escape a double-dip recession.

Some central bankers feel the economy may manage to pull out of the current lull sooner than initially thought.

The BOJ's top economist, Kazuo Momma, said on Wednesday he expects Japan to escape a lull by March or at least during the first half of this year. [ID:nTOE70I05O]

However, others in the central bank may not be as optimistic and may want more evidence that exports have recovered sustainably from a late 2010 weak patch before declaring economic recovery.

While the central bank is expected to revise up its economic growth forecast for the current fiscal year ending in March from 2.1 percent predicted in October, it is also likely to trim slightly the forecast for the following year.

The revisions will reflect both the effect of government incentives and revisions to historical GDP figures, leaving the overall outlook broadly intact.

That, combined with the yen's retreat from 15-year highs against the dollar hit late last year, should allow the BOJ to hold off with any new policy action.

The new forecasts will likely be roughly in line with a Reuters poll for 3.3 percent growth in the year to March and 1.4 percent growth in the next fiscal year.

MARKET IMPACT: Little reaction expected as markets are anticipating no major change to the BOJ's growth forecasts.

SIGNAL EARLY END TO DEFLATION ON COMMODITY RALLY

POSSIBILITY: UNLIKELY

The BOJ does not see the recent spike in commodity prices as big enough to alter its view that deflation will ease only gradually in Japan.

That is because anaemic domestic household spending is keeping companies from passing the rising costs on to consumers, a trend that has kept Japan in deflation for a decade.

It also means that even if consumer prices started rising later this year because of higher commodity costs, the BOJ would be unlikely to abandon its ultra-easy policy bias out of concern about the possible damage to corporate profits and its wider economic impact.

The central bank is thus expected to stress that there will be no policy change unless rising prices are accompanied by a solid economic recovery and driven by a pickup in domestic demand.

The BOJ is unlikely to make major changes to its October forecast that core consumer prices will rise 0.1 percent in the year beginning in April and rise 0.6 percent the following year.

The central bank has pledged to keep interest rates effectively at zero until price stability, which it views as consumer inflation around 1 percent, is in sight.

MARKET REACTION: Bond yields may rise if Governor Masaaki Shirakawa signals in his post-meeting news conference that an end to deflation is in sight, although this is highly unlikely.

EASE POLICY BY TOPPING UP ASSET BUYING POOL

POSSIBILITY: HIGHLY UNLIKELY

Last year, the central bank cut interest rates effectively to zero and set up a 5 trillion yen ($61 billion) pool of funds to buy assets ranging from government bonds to private debt.

The BOJ has said it is ready to top up the pool if growth outlook deteriorates, but it would have taken a severe financial market shock, such as another yen rally or a stock market slump triggered by Europe's debt woes, to force the bank's hand.

MARKET REACTION: The surprise effect would hit bond yields and the yen, although this would probably wear off quickly. ($1=82.59 Yen) (Editing by Tomasz Janowski and Nathan Layne)