By Leika Kihara
TOKYO (Reuters) -The Bank of Japan (BOJ) is expected to maintain ultra-loose monetary policy this week and its forecast for a moderate economic recovery, as robust corporate and household spending cushion the blow from slowing overseas demand, sources said.
The central bank also may signal that inflation is overshooting its forecasts, which would heighten the chance of an upgrade in its price projections at a quarterly review of its estimates due in July, they said.
But any upgrade in its inflation view is unlikely to automatically trigger an interest rate hike, as BOJ Governor Kazuo Ueda has stressed the need to maintain ultra-loose policy until durable wage growth accompanies the price rises.
Ueda told parliament on Friday that corporate price-setting behaviour was showing changes that could work to push up inflation more than expected.
"Consumption appears to be holding up and underpinning the economy," said one source familiar with the BOJ's thinking.
"But the BOJ must support the economy to ensure recent positive signs are sustained, and help Japan sustainably achieve 2% inflation," the source said, a view echoed by two more sources.
At a two-day policy meeting ending on June 16, the BOJ is likely to maintain its -0.1% short-term interest rate target and a 0% cap on the 10-year bond yield set under its yield curve control (YCC) policy, the sources said.
Reflecting soft U.S. and Chinese demand, the BOJ may offer a slightly bleaker view on exports and output than at the previous meeting in April, the sources said. In April, it said exports and output were moving sideways.
But the BOJ will stick to its view the world's third largest economy is headed for a moderate recovery as a post-pandemic pickup in consumption offsets soft exports, they said.
While the BOJ will not produce fresh inflation forecasts next week, it may signal that inflation is overshooting initial projections - possibly at Ueda's post-meeting briefing, the sources said.
Japan's economy expanded a stronger-than-expected 2.7% in the first quarter on robust capital expenditure and solid domestic demand.
Core consumer inflation hit 3.4% in April as companies continued to hike prices, casting doubt on the BOJ's view that inflation will slowly move back below 2% toward the latter half of the current fiscal year ending in March 2024.
An index stripping away the effects of both fresh food and fuel - closely watched by the BOJ as a barometer of domestic demand-driven price trends - rose 4.1% in April from a year earlier, the fastest pace in four decades.
"It's true inflation is somewhat overshooting the BOJ's initial projections," a second source said. "The BOJ must be vigilant to both the risk of an inflation overshoot, and the risk of a deep overseas slump hitting Japan's economy."
With droves of companies continuing to hike prices, the BOJ is widely expected to upgrade its inflation forecasts at its next quarterly review in July, analysts say.
In forecasts made in April, the BOJ expects core consumer inflation to hit 1.8% in the current fiscal year, much lower than 2.6% projected in a recent Reuters poll.