By Leika Kihara
TOKYO (Reuters) - Bank of Japan policymakers will debate this week whether structural factors may be behind recent disappointingly slow inflation, which could force them to cut the central bank's price forecasts at a quarterly review in July.
The central bank is not expected to changes policy settings. But it could look more closely at the role technology and innovation play in keeping price growth low after surprisingly weak inflation dashed hopes that record profits could nudge firms into hiking prices at the start of the current fiscal year in April.
Many Japanese companies tend to change prices for their goods and services in the new fiscal year.
The softness in inflation could also force the BOJ to shun any talk of whittling down its massive stimulus program, even as its U.S. and European peers dial back crisis-mode policies, say sources familiar with the BOJ's thinking.
"When inflation is so subdued, it's hard to signal even prospects of a future exit from easy policy," said one of the sources, a view echoed by two more sources.
At a two-day rate review ending on Friday, the BOJ is set to keep monetary settings unchanged and maintain its view that the economy remains on course for a moderate expansion.
While central bankers are confident growth will rebound from a contraction in the first quarter, they are brainstorming ideas on what may be holding back inflation, the sources say.
The findings likely won't be revealed until a subsequent meeting in July, but one emerging idea puts the blame for weak inflation on corporate efforts to boost productivity, they say.
Instead of raising wages to meet labor shortages or passing on rising costs to consumers, firms are streamlining operations to make ends meet. Wider use of online shopping also gives consumers the chance to compare prices more broadly, which puts pressure on inflation.
Such moves, while good for the economy long-term, could weigh on price growth for years, the sources say, keeping the BOJ's 2 percent inflation target elusive.
"Companies are undertaking capital expenditure to streamline operations and reviewing inefficient businesses," BOJ board member Makoto Sakurai said in a speech last month.
"The increase in companies' output capacity could delay rises in wages and inflation in the short-term. But this likely won't be a permanent drag," he said.
Japan's economy enjoyed the longest run of expansion since the 1980s bubble economy until shrinking an annualized 0.6 percent in the first quarter. Many analysts expect growth to rebound from a soft patch they blame on unusually bad weather.
However, BOJ policymakers are likely to be more concerned about stubbornly low inflation than the recent contraction. Core consumer prices rose 0.7 percent in April from a year earlier, slowing for the second straight month.
Core consumer inflation for Tokyo, a leading indicator for nationwide trends, hit 0.5 percent in May in a sign the economy is lacking momentum to drive up prices.
Reflecting the gloomy data, some in the BOJ are bracing for a further cut in its price forecasts at the next quarterly review in July.
In forecasts released in April, the BOJ expects core consumer inflation to hit 1.3 percent in the year ending in March 2019, and accelerate to 1.8 percent the following year.
That compared with a Reuters poll that forecast inflation of 0.9 percent for both years.
"Inflation is surprisingly weak, especially for non-energy goods. It shows companies are very reluctant to raise prices, after previous price hikes scared away consumers," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"It's only a matter of time before the BOJ cuts its price forecasts again. It may do so in July or wait until October."