By Leika Kihara and Kaori Kaneko
TOKYO (Reuters) - The Bank of Japan is expected to extend on Friday a package of steps aimed at easing corporate funding strains caused by the coronavirus, as a renewed spike in infections cloud prospects of recovery from the health-crisis-induced economic slump.
Data released earlier in the day showed core consumer prices dropped at their fastest pace in a decade in November, stoking fears of a return to deflation and keeping policymakers under pressure to take stronger steps to prop up growth.
With markets stable and overseas demand showing signs of life, however, the central bank is likely to keep interest rates steady and maintain its view the world's third-largest economy is gradually emerging from the pandemic's initial damage.
"While firms are wary of spending, business sentiment is recovering and inflation expectations are bottoming out," said Hiroshi Ugai, chief Japan economist at JPMorgan (NYSE:JPM) Securities.
"Aside from an expected extension in its fund-aid programme, the BOJ won't take steps to prop up growth and inflation."
At Friday's rate review, the BOJ is seen extending by at least six months the March 2021 deadline for a range of steps aimed at pumping money to pandemic-hit firms.
BOJ Governor Haruhiko Kuroda is expected to stress at his post-meeting briefing his readiness to roll out more stimulus if risks threaten to derail Japan's fragile recovery.
Central banks across the globe have been forced to maintain or even ramp up their already massive stimulus programmes as the health crisis persists.
The Federal Reserve on Wednesday vowed to keep funnelling cash into markets until the U.S. recovery is secure, while the European Central Bank last week ramped up stimulus to lift the currency bloc out of recession.
The BOJ hopes its fund-aid programme, deployed in March through May to deal with the immediate hit from COVID-19, will be enough to underpin a recovery.
The package includes increased purchases of corporate debt and a lending scheme to channel money via banks to small firms.
Japan's economy rebounded in July-September from its worst postwar contraction in the second quarter, though the third wave of infections is dampening prospects for a strong revival.
The government announced this month a fresh $708 billion spending package to speed up the recovery, bringing the combined value of Japan's pandemic-related spending to about $3 trillion.