By Leika Kihara
TOKYO (Reuters) - The Bank of Japan is likely to hold off on expanding stimulus next week despite an expected downgrade in its price forecast that may show Governor Haruhiko Kuroda won't see inflation hit his 2 percent target before his tenure ends in 2018.
With policy on hold, the nine-member board may also debate some operational details of its new policy framework adopted last month, such as to what extent the central bank could slow its bond purchases if yields fall below target.
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In a quarterly evaluation of its forecasts due at the rate meeting, the central bank will cut next fiscal year's inflation forecast slightly, reflecting weak consumption and falling import costs from a strong yen, sources have told Reuters.
The review may also extend the timeframe for hitting its ambitious inflation target beyond Kuroda's five-year term that ends in April 2018. At present, the BOJ projects inflation to reach 2 percent during the fiscal year ending in March 2018.
The BOJ is expected at the two-day meeting ending on Tuesday to maintain its minus 0.1 percent short-term interest rate target and a pledge to guide 10-year government bond yields around zero percent, after having modified its policy framework to one better suited for a long-term battle against deflation.
While global uncertainties such as the outcome of the U.S. presidential election loom, the central bank sees few imminent risks that could derail Japan's moderate economic recovery.
"A downgrade in the BOJ's inflation forecast won't automatically lead to additional easing," said a source familiar with its thinking, a view echoed by two other sources.
SMOOTH FOR NOW
The BOJ last month switched to a policy of targetting interest rates rather than the pace of its money printing, after years of massive asset purchases failed to jolt the economy out of stagnation.
Under a new "yield curve control" (YCC) framework, the BOJ's main easing mechanism would be to deepen negative rates, accompanied if needed by a cut in its 10-year yield target.
BOJ officials believe the yield curve control is working smoothly for now. Bond markets have remained stable even as the bank slightly trimmed its purchases of super-long bonds this month.
But officials are hardly complacent and stress the BOJ won't sharply cut bond purchases for the time being - particularly to avoid markets jumping to the conclusion that the BOJ was getting ready to taper its massive stimulus programme.
Some officials say the biggest challenge for the board would be to agree at each rate review what a desirable yield curve should look like, particularly if bond yields spike on external factors beyond the BOJ's control, or slump on gloomy projections of Japan's economic outlook.
"Just because things are going smoothly so far does not mean they will remain so in the future," another source said.
At the usual post-meeting news conference, Kuroda may reiterate that the BOJ could accelerate or slow bond purchases any time in the future with interest rates - not the amount of buying - now the main policy target.
(Reporting by Leika Kihara; Editing by Eric Meijer)