Bank of Japan

Will the BoJ alter its inflation target?

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The Bank of Japan (BoJ) is set deliver its closely-watched biannual economic Outlook Report at Friday's monetary policy meeting, which may offer clues about the central bank's next move.

The Outlook for Economic Activity and Prices report, released in April and October, includes projections for Japan's real economic growth and inflation rates through fiscal 2016.

With inflation far off from the BoJ's goal of 2 percent by April 2015, the market will focus on the outlook for consumer prices and whether the central bank will revise its target.

Adjusted for a sales tax hike that took effect in April, the nationwide core consumer-price index (CPI) rose 1.1 percent on year in August. CPI data for September is due on Friday.

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"The deadline is very close, inflation is not anywhere close to the target and the economy is not growing fast enough to push it to 2 percent target," Martin Schulz, senior economist, Fujitsu Research Institute told CNBC.

The BoJ is likely to push back its inflation target to a later date, perhaps late 2015, and cut its growth outlook, Schulz said.

"But they will stress that the situation will look much better with a longer horizon," he said.

Recent economic indicators suggest the world's third largest economy is turning a corner. Data this week showed industrial production rose 2.7 percent on month in September, above expectations for a 2.2 percent rise, marking the fastest expansion since January.

Stimulus speculation

The BoJ's commentary around its inflation target will influence the market's expectations for the central bank's next move.

"If they leave the target in place, or just water it down a bit, they would need to follow through additional monetary action, which would either be announced on Friday or November at the latest," said Schulz.

Vishnu Varathan, economist at Mizuho expects a different outcome.

The central bank will likely allude to downside risks from softer global oil prices Instead of changing its inflation target, Varathan said.

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"Saying the 2 percent target is not realistic, or saying it will take longer to reach shows them conceding to some extent, which would undermine their broader credibility," he said.

Varathan also expects the central bank to hold off from unleashing fresh stimulus.

The BoJ has been signaling that the government will have to stick to its fiscal commitments, most notably the second sales tax hike, before it commits to further stimulus, he said.

"The BoJ has every reason to hold its horses this week, and essentially this year, as it watches the VAT (value-added tax) ball on the government's court."

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Prime Minister Shinzo Abe is expected to make a decision on whether to go ahead with the second sales tax increase in early December.