By Leika Kihara
TOKYO (Reuters) - The Bank of Japan is expected to forecast next week that inflation will remain below its 2 percent target through the fiscal year that ends in March 2022, sources say, a sign its massive stimulus will stay in place for the foreseeable future.
The estimate highlights the dilemma the BOJ faces as subdued inflation forces it to maintain its ultra-easy policy, even as years of near-zero interest rates strain financial institutions.
In quarterly projections due next week, the central bank may slightly cut its growth and price forecasts for the current fiscal year, ending in March 2020, due to headwinds from slowing overseas growth, say sources familiar with its thinking.
For the first time, the BOJ will also release forecasts for fiscal 2021 that will project inflation to move above 1.5 percent but fall short of 2 percent, the sources said on condition of anonymity.
"Inflation is holding up but isn't accelerating much either," said one source. "Inflation will gradually head toward 2 percent but the pace will be moderate at best."
With its 2 percent inflation target seen out of reach, the BOJ will join other major central banks that are being forced to delay plans to end crisis-mode policies due to soft inflation and growing signs of a global economic slowdown.
STICKING TO ITS VIEW
At the two-day rate review ending on Thursday, April 25, the BOJ is widely expected to maintain its pledge to guide short-term rates at minus 0.1 percent and long-term yields around zero under a policy dubbed yield curve control (YCC).
The central bank is also seen sticking to its view that Japan's economy will emerge from a soft patch and resume a moderate expansion in the second half of 2019, they said.
"As long as the economy is in good shape and there is no major external shock, the BOJ can stay pat even if inflation does not hit 2 percent," another source said.
Under projections issued in January, the BOJ expects core consumer inflation to hit 1.1 percent in the current fiscal year and accelerate to 1.5 percent the following year.
It also predicts the economy will grow 0.9 percent this fiscal year and 1.0 percent the following year.
The BOJ is in a bind. Years of heavy money printing have failed to fire up inflation to 2 percent and left it with little ammunition to fight the next recession.
Prolonged easing has also added to pains for regional banks, already facing slumping profits due to an aging population and an exodus of borrowers to big cities.
The BOJ has notched up its warning against the rising drawbacks of its policy. In a semi-annual report analyzing the banking system on Wednesday, it said nearly 60 percent of regional banks could suffer net losses a decade from now if corporate borrowing keeps falling in line with the current trend.