BOJ seen holding policy steady, may cut inflation forecast

TOKYO Wed Jul 11, 2012 7:20pm EDT

A bird and the sun are reflected on a signboard of the Bank of Japan at its headquarters in Tokyo July 2, 2012. REUTERS/Toru Hanai

A bird and the sun are reflected on a signboard of the Bank of Japan at its headquarters in Tokyo July 2, 2012.

Credit: Reuters/Toru Hanai

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TOKYO (Reuters) - The Bank of Japan is expected to hold off on further policy easing on Thursday despite slowing global growth that drove other major central banks into expanding stimulus, convinced that robust domestic demand will keep the country's economic recovery on track.

The central bank may slightly cut its consumer price forecast for this fiscal year to reflect recent declines in commodities markets, but is seen maintaining its view that Japan is gradually heading for 1 percent inflation.

Some market players had expected the BOJ to follow up on last week's stimulus measures by the central banks of Europe, Britain and China with its own monetary expansion in a coordinated move to ease the pain from the global slowdown.

But with no clear signs that Japan's recovery prospects are under threat and the yen off record highs, the central bank sees little need to tap its depleted arsenal now.

"Developments in Europe have stabilized, and I don't expect any major change to the BOJ's growth forecasts. The central bank may pause for a while," said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.

"It may face renewed pressure to act around autumn, when the government starts fretting about keeping the economy afloat so it can weather the pain from planned sales tax hikes."

The BOJ is expected to keep its policy rate at a range of zero to 0.1 percent, and hold off on a further increase in its 40 trillion yen ($503 billion) asset buying programme.

Japan's economy is expected to outperform most of its G7 peers this year with growth of around 2 percent, helped by reconstruction spending following last year's earthquake.

BOJ officials have stressed that any further easing will come only if risks to Japan's economy heighten enough to force the central bank to abandon its forecast of a moderate recovery.

While worried about slowing Chinese growth and the fallout from Europe's debt crisis, they expect global demand to soon pick up.

In a quarterly review of its forecast, the BOJ is expected to make only minor tweaks to its current projection that the economy will expand 2.3 percent in the year to March 2013 and 1.7 percent the following year, sources say.

Lower commodity prices may prompt the BOJ to cut its core consumer inflation forecast of 0.3 percent for the current fiscal year but probably just by around 0.1 or 0.2 percentage points, not enough to alter its view that Japan will gradually head toward 1 percent inflation.

Its forecast of 0.7 percent consumer inflation in the following year will likely remain roughly unchanged.

The central bank set the 1 percent inflation target and eased policy in February, and followed up with additional stimulus in April, to show its determination to reinflate an economy beset with more than a decade of grinding deflation.

It has stood pat since then and, already struggling to force-feed money to markets awash with cash, is reluctant to boost its asset buying and lending programme too hastily.

The BOJ may fine-tune its fixed-rate market operations, under which it offers three- and six-month funds against collateral, after failing to meet its target recently for some of its market operations. ($1 = 79.4700 Japanese yen) (Editing by Kim Coghill)

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