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BOJ inflation prediction to show limits of Gov Kuroda's ultra-easy policy

FILE PHOTO: Bank of Japan Governor Haruhiko Kuroda speaks at a news conference in Tokyo

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan is set to predict for the first time that inflation will remain well short of its 2% target beyond Governor Haruhiko Kuroda's term through early 2023, say sources familiar with its thinking.

The central bank is also expected to trim this fiscal year's inflation forecast reflecting cuts in cellphone charges, the sources say, underscoring the challenge it faces in eradicating Japan's sticky deflationary mindset.

Such projections, to be made in fresh quarterly estimates due out next week, would reinforce expectations the BOJ will maintain its massive stimulus for the foreseeable future.

While the BOJ may paint a rosier view on the economy due to robust exports, it will warn of the strains on consumption from a recent resurgence in COVID-19 infections, they said.

"Solid external demand is helping Japan's economy but renewed pandemic-related curbs cloud the outlook," said one of the sources.

"It will take time for inflation to clearly pick up, given underlying weakness in price growth," said another source, a view echoed by two other sources.

The world's third biggest economy has emerged from last year's pandemic-induced slump on support from exports. But slow vaccine rollouts and renewed curbs to contain the virus cloud the outlook.

At the two-day rate review ending on April 27, the BOJ is set to maintain its short-term interest rate target at -0.1% and that for long-term rates around 0%.

In a quarterly report due out after the meeting, the BOJ is seen trimming its core consumer inflation forecast for the year that began in April from the current 0.5%.

It will also release for the first time forecasts for fiscal 2023, which will show inflation hovering around 1%, they said.

While such downbeat price forecasts should come as little surprise to markets, they would mark a symbolic defeat for Kuroda whose current five-year term ends in April 2023.

Years of heavy money printing have failed to fire up inflation to the BOJ's target, forcing it to maintain for an extended period what was initially intended as a quick fix to beat deflation.

In the report, the BOJ may revise up this year's growth forecast and offer a more upbeat assessment on the economy than three months ago, as strong U.S. and Chinese growth underpins exports, the sources said.

But the central bank will warn any recovery will be modest as a resurgence in infections hurt consumption, they said.

In current projections made in January, the BOJ expects the economy to grow 3.9% this fiscal year and expand 1.8% the following year.

(Reporting by Leika Kihara; Editing by Shri Navaratnam)