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.