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BOJ to stand pat, stick to upbeat economy view despite tax rise

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The Bank of Japan is expected to maintain its massive stimulus on Friday and reiterate its upbeat view that the economy is strong enough to weather next year's sales tax increase without additional monetary policy measures.

The nine-member board is also likely debate how the U.S. Federal Reserve's decision last month to delay tapering its own asset-buying program could affect capital flows and the global economic outlook.

At the two-day rate review concluding on Friday, the BOJ is widely expected to keep its monetary easing intact, under which it aims to double base money via asset purchases to meet its target of lifting inflation to 2 percent in roughly two years.

(Read more: Japan's Abe to rule on sales tax rise: Will he, won't he?)

The policy review follows Prime Minister Shinzo Abe's decision on Tuesday to proceed with a planned increase in the sales tax to 8 percent from 5 percent next April and cushion its impact with a 5 trillion yen ($51 billion) stimulus package.

BOJ Governor Haruhiko Kuroda is expected to welcome Abe's decision as an important first step in reining in Japan's huge public debt which, at double the size of its $5 trillion economy, is the biggest among major industrialized nations.

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The BOJ expects the sales tax increase to shave about 0.7 percentage point off growth. For now, it sees no need to expand its stimulus further, confident that the world's third-largest economy can withstand the hit.

"Our main scenario is that overseas economies will gradually pick up as the U.S. and European economies improve," Kuroda said in a speech two weeks ago. "That will support increases in exports and output, as well as a pick-up in capital expenditure in Japan."

(Read more: Japan salestax hike masks bigger problem of welfare spending)

Sources familiar with the BOJ's thinking say given the tax rise is factored into its outlook, the government's stimulus package could see the central bank revise up its long-term growth forecasts, due for release on October 31.

BOJ policymakers will kickstart debate on the benefits the fiscal package will deliver to the economy, as well as risks such as the uncertainty over the U.S. economy that prompted the Fed to put off tapering its asset-buying program.

Japan's economy has now grown for three successive quarters as Abe's reflationary policies bolstered household spending and drove down the yen, benefiting exports, with annualized growth of 3.8 percent in April-June outpacing many G7 nations.

(Read more: Shinzo Abe's letdown puts onus on Bank of Japan)

Big manufacturers' sentiment has risen to its highest in nearly six years, the BOJ's "tankan" survey for the September quarter showed, underscoring its view the economy is on track for a moderate recovery.

The BOJ estimates that even with the sales tax increase, the economy will expand 1.3 percent in the business year beginning in April next year. This already far outpaces the 0.7 percent growth projected in a recent Reuters poll.

Having launched its intense burst of stimulus in April, the BOJ does not want to act again easily. But it has not ruled out expanding stimulus if the damage from the tax hike proves bigger than expected and threatens achievement of 2 percent inflation.

The big test will come in spring next year, and not just from the sales tax hike. There will also be more clarity on whether companies will raise wages enough to offset some of the pain households will feel from the tax hike, BOJ officials say.