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Japan data to turn up heat on BOJ action debate

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A deluge of Japanese economic data on Friday is set to influence expectations on whether the Bank of Japan (BOJ) will top up its stimulus program.

Data are expected to show the world's third-largest economy remained in a soft patch in July following the April consumption tax hike to 8 percent from 5 percent.

The nationwide core consumer price index will be the key focus. The index, which excludes volatile prices of fresh food, is forecast to rise 3.3 percent on year in July - or 1.3 percent excluding the impact of the tax increase – far below BOJ's 2 percent inflation target.

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"With inflation forecast to be stagnant, there are growing expectations that Kuroda will be forced to increase stimulus," said Evan Lucas, market strategist at IG.

Over the weekend, BOJ Governor Haruhiko Kuroda said the central bank will remain committed to its accommodative stance until the 2 percent inflation target is met and maintained in a sustainable manner.

The central bank launched an aggressive easing program in April last year to lift the economy out of two decades of stagnation, but has stood pat on policy since.

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Other indicators due Friday including retail sales, household spending and industrial output, are also expected to indicate weak domestic demand.

Retail sales are forecast to tick up 0.1 percent on year in July after falling 0.6 percent in the previous month.

"Consumer confidence has improved a little in recent months, although nominal wages are flat and real incomes are falling," said Moody's Analytics' economists.

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Household spending is expected to fall 3 percent, after dropping by the same amount in the previous month.

Industrial output, however, could be a relative bright spot. It's expected to increase by 1 percent on month after sliding 3.4 percent in June.

"The pickup in external demand, from Asia in particular, is supporting a recovery in industrial production," said Long Hanhua Wang, economist at RBS.

Read MoreJapan firms hit by labor crunch, many see profits squeezed

While July economic data may be on the softer side, Wang believes it'sunlikely to distress the BOJ.

The central bank will wait to see how the economy fares in the third quarter before considering changing its policy stance, he said.

"We're expecting a rebound in growth in the third quarter helped by a pickup in industrial production and improving labor market, which should begin to support household consumption," he added.

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