By Stanley White and Minami Funakoshi
TOKYO (Reuters) - Japan's government on Wednesday cut its forecasts for consumer prices and economic growth, a blow to the Bank of Japan's ambitious project to achieve 2 percent inflation with massive purchases of government debt.
The government expects consumer prices to rise 0.4 percent in the current fiscal year ending in March 2017, down from a 1.2 percent increase projected in January.
Also, the government on Wednesday forecast consumer prices to rise 1.4 percent for fiscal 2017, well below the 2 percent target the BOJ says will be met during the fiscal year to end in March 2018.
The downgrade reflects weaker-than-expected economic growth, slumping oil prices and a strong yen, which is pushing down import costs.
The government expects the economy to expand 0.9 percent in the current fiscal year, down sharply from 1.7 percent projected in January.
Wednesday's downgrade is likely to fuel expectations the BOJ will lower its own forecasts at a meeting later this month and expand monetary easing to try to convince households and companies that the economy will not return to deflation.
The government usually produces economic and price estimates in January, which serve as a basis for compiling the state budget, and revises them around mid-year.
Markets are simmering with speculation that the BOJ will cut its inflation forecasts and expand its already massive stimulus program at a July 28-29 rate review, as a hit to exports from a strong yen and weak consumption has added to downward pressure on the economy and prices.
In its last projections made in April, the BOJ forecast core consumer inflation of 0.5 percent in fiscal 2016, and 1.7 percent the following year.