Even as growth and deflation fears roil global markets and weak data casts a shadow over Japan's economy, the Bank of Japan appears set to resist pressure for more stimulus measures or to accept that its inflation target is unrealistically high.
People familiar with its deliberations said the BOJ, which has failed for two decades to drag Japan's economy from the grip of no or zero inflation, is preparing to roughly halve its 1 percent economic growth forecast for this fiscal year, but stand pat on policy and its prediction that inflation will hit its 2 percent target in the year from next April.
Private economists think inflation has peaked at barely half the bank's forecast rate, however, and financial markets had been expecting the central bank to add to its massive monetary easing, with speculation growing it could act at its policy meeting on Oct. 31.
"We think the BOJ's view on consumer prices is overly optimistic," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities. BNP's current expectations for inflation are around 1.8 percent at the end of 2015, but Shiraishi said global conditions could render that time frame optimistic, too.
A sharp slide in Japanese stocks and a rebound in the yen, driven in part by concerns about global growth, have added to headwinds for Japan's economy, which is struggling with soft exports and the chilling effect of a sales tax hike in April.
Tokyo shares are down 10 percent from September's seven-year high, while the dollar has slid to around 106 yen from a six-year high of 110 yen in the past two months.
The sources said BOJ officials think the market turmoil is temporary and unlikely to do lasting damage to the economy. They are unlikely to change their on-hold policy stance unless it becomes a shock severe enough to derail their forecast of moderate economic recovery, the sources added.
BOJ Governor Haruhiko Kuroda has stuck to his upbeat tone on the outlook, stressing that Japan is on track to meet the BOJ's inflation target as the pain of the jump in sales tax to 8 percent from 5 percent starts to ebb.
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"Japan's economy is expected to continue growing at a pace above its potential as a trend since the virtuous cycle from income to spending has been operating steadily in both the household and corporate sectors," Kuroda told investors in New York last week.
At the Oct. 31 meeting, the BOJ will release new long-term economic and price forecasts in a semi-annual report that serves as a basis for policy decisions.
In a quarterly review in July, the BOJ forecast core consumer inflation would hit 1.9 percent next fiscal year, higher than the 1.2 percent projection in the latest Reuters monthly poll of economists. The BOJ tips 2.1 percent inflation for the year from April 2016.
The bank's forecast of 1.0 percent growth this fiscal year is also much higher than the Reuters survey result of 0.3 percent.
Recent weak data has cast a shadow over the BOJ's optimism that the economy is on course for moderate recovery. Factory output slumped as companies were saddled with a huge pile of inventory due to sluggish demand after the April tax hike.
Taking out the effect of sales tax hike, core consumer inflation is barely above 1 percent. Some analysts warn it may slip below 1 percent in September due to recent sharp falls in oil prices, despite Kuroda's assurances that price growth will stay above that level before accelerating to 2 percent.
Economic growth likely slipped slightly below its long-term potential in the second quarter, BOJ estimates show. This output gap is a key determinant of future prices.
But the BOJ is keen to avoid making big changes to its rosy price forecasts, as doing so would ramp up pressure to do more and expand stimulus further. It is likely to argue that a boost to import prices from the yen's declines in September will offset downward pressure on prices.
Having seen profits rise thanks to Prime Minister Shinzo Abe's stimulus policies, companies are seen boosting capital spending and wages to lure employees in a tightening job market. That will also help accelerate inflation, BOJ officials say.
"What's important is that the positive economic cycle remains in place," one official said.
The BOJ has resisted stepping up stimulus since deploying an intense burst in April last year, when it pledged to double base money - cash and deposits at the central bank - via aggressive asset purchases to achieve its 2 percent inflation target in roughly two years.