The Bank of Japan is likely to maintain its massive monetary stimulus on Tuesday and offer a bleaker view on factory output, following signs that the world's third largest economy was hit harder than expected by a sales tax increase six months ago.
Central bank policymakers are seen sticking to their view that the economy will pass through a temporary soft patch to resume a moderate recovery and achieve the bank's 2 percent inflation target next year without additional monetary stimulus.
An intense burst of monetary and fiscal stimulus, which were the first two arrows of Prime Minister Shinzo Abe's strategy to end 15 years of deflation, has helped boost business sentiment by lifting share prices and weakening the yen.
But his growth strategy to boost Japan's long-term economic potential, dubbed the third arrow of "Abenomics," has disappointed markets and cast doubts on the success of reviving the economy on a sustained basis.
Markets will focus on whether BOJ Governor Haruhiko Kuroda remains optimistic at his post-meeting briefing, despite recent data suggesting the economy may have entered a mild recession following the April sales tax hike to 8 percent from 5 percent.
"Capital expenditure is pretty strong," Kuroda was quoted as saying at a key government panel last week, stressing that a positive economic cycle remained in place as rising profits prompt companies to boost hiring and spending on equipment.
The BOJ is widely expected to maintain its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 60-70 trillion yen ($547-$638 billion) through purchases of government bonds and risky assets.
After a surprise slump in August factory output, the BOJ is likely to cut its assessment on production from last month, when it said the trend in output was for a continued rise, albeit with some weaknesses, sources familiar with the central bank's thinking said.