By Leika Kihara
TOKYO (Reuters) - The Bank of Japan will factor in the government's planned fiscal stimulus package in producing new quarterly projections this month, which will help moderate any cuts to its inflation forecasts, sources familiar with its thinking said.
The boost to growth from the fiscal package and the postponement of next year's scheduled sales tax hike may take some pressure off the central bank to expand an already massive stimulus program, some analysts say.
"A downgrade to the BOJ's price forecasts is inevitable. But the bank may use expansionary fiscal policy to keep the cuts at a minimum if it wants to avoid easing," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
The BOJ is usually reluctant to factor in the effect of fiscal stimulus packages unless details, including the actual size of spending, are finalised and announced by the government.
Prime Minister Shinzo Abe has yet to announce the size of his planned stimulus package and may not finalize the amount before the BOJ's policy meeting on July 28-29, when the bank conducts a quarterly review of its growth and price forecasts.
But the BOJ will likely take into account the impact from the upcoming package, which analysts say could be worth around 10 trillion yen ($96 billion), and the boost to consumption from a delay in the sales tax hike scheduled for April 2017, the sources said.
"The prime minister has made it quite clear there will be a sizable stimulus package aimed at beating deflation," said one of the sources. "It would be strange not to take into account the effect of such a package in compiling estimates."
LESS UPBEAT ON TREND INFLATION
At its June policy meeting, the BOJ used downbeat language in its outlook for consumer inflation, suggesting it might cut its rosy price projections for the current and possibly next fiscal year due to weak consumption and a strong yen.
However, a boost from looser fiscal policy would offset some of the downward pressure on prices, helping the BOJ make the case Japan is on track to hit its price target.
The sources said while the BOJ may offer a slightly bleaker view on prices from its current assessment that underlying trend inflation is "improving steadily", this would not immediately trigger monetary easing if bank board members feel they can stick to their forecast that inflation will accelerate ahead.
Markets currently expect the BOJ will cut its inflation forecasts and expand stimulus this month to show its determination in hitting its 2 percent price goal.
The BOJ now projects core consumer inflation to hit 0.5 percent in the current fiscal year ending in March 2017 and 1.7 percent the following year, much higher than private forecasts of around 0.1 percent and 0.8 percent, respectively.
Many BOJ policymakers prefer to avoid a sharp cut in their fiscal 2017 inflation forecasts as that would mean pushing back again the timing for hitting the bank's price target - now set at "around fiscal 2017".
BOJ Governor Haruhiko Kuroda has stressed that he won't hesitate easing policy if needed to hit the price target. But many board members are wary of acting too soon given the bank's dwindling policy tool-kit.
"Data on prices and inflation expectations are all very weak, so it's hard to argue that the broad price trend is improving. But there's a good chance the BOJ will forgo easing in July because it's uncertain whether the benefits of more action exceed the costs," said Shinke of Dai-ichi Life Research.
($1 = 104.1700 yen)
(Additional reporting by Sumio Ito; Editing by Sam Holmes)