BOJ keeps rates steady; focus on inflation

GLOOMY OUTLOOK

Economists expect rising energy and food prices to push up Japan's annual inflation, which stood at 0.9 percent in April, to near 1.5 percent or even 2 percent by later this year.

Some within the BOJ believe there is now a bigger chance for the rise in core consumer prices to overshoot the bank's forecast of 1.1 percent in the fiscal year ending next March 31.

Annual wholesale inflation hit a 27-year high of 4.7 percent in May, data showed on Wednesday, with pressure on companies from spikes in costs of materials.

Even so, inflation is less a problem in Japan than in other parts of the world such as the euro zone, where it hit a record 3.6 percent in May.

Japanese companies are only slowly passing on rising raw material costs in the prices of their goods as tame wage growth keeps consumers' purse strings tight.

Weakness in the economy remains the BOJ's immediate concern, particularly with higher raw materials costs hurting corporate activity, the key driver of Japan's economy.

In a sign of softness in private spending, consumer confidence sank in May to the lowest level since the end of 2001, government data showed on Friday.

(Additional reporting by Yuzo Saeki)