TOKYO The Bank of Japan is set to keep monetary policy steady on Thursday and signal its conviction the country's economic recovery is gaining momentum, taking heart from renewed optimism over the global economy as political concerns in France ebb.
But BOJ Governor Haruhiko Kuroda is likely to remind markets that the Japanese central bank is nowhere near an exit from its massive monetary stimulus, with inflation hovering well below the bank's ambitious 2 percent target.
Several BOJ policymakers, including deputy governor Kikuo Iwata, have said the bank is conducting internal studies on how it could eventually withdraw stimulus, though they add an actual exit would be some time away.
"The key message the BOJ wants to send out now is that there is no near-term plan of an exit, and that the focus is on keeping its stimulus intact," said a source familiar with its thinking, a view echoed by two more sources.
At the two-day rate review that ends on Thursday, the BOJ is likely to offer a more upbeat assessment of the economy than it did last month as a pick-up in overseas demand bolsters exports and factory output.
But the central bank may slightly cut its rosy inflation forecast for this fiscal year at a quarterly review of its projections and highlight factors weighing on prices, such as slow wage growth and soft household spending, analysts say.
"Global economic prospects have brightened but the BOJ would be cautious of giving out any signs it may withdraw its stimulus as doing so could trigger an unwelcome yen rise," said Mari Iwashita, chief market economist at SMBC Friend Securities.
"It's also hard to justify talking about an exit when inflation is nowhere near even 1 percent," she said.
SLOW TO EXIT
At Thursday's meeting, the BOJ is widely expected to leave unchanged its commitment to guide short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent through aggressive asset purchases.
Analysts also expect the central bank to maintain a loose pledge to keep increasing its government bond holdings by 80 trillion yen ($719 billion) per year.
Japan's economy has shown signs of life, as exports rose the most in over two years in March and manufacturers' confidence hit the highest since the global financial crisis a decade ago.
But core consumer prices for February rose just 0.2 percent from a year earlier, keeping markets doubtful of the BOJ's forecast inflation will hit its 2 percent target by March 2019.
While a pioneer in deploying unorthodox stimulus, the BOJ is likely to lag behind its peers in withdrawing monetary support.
The U.S. Federal Reserve is already embarking on interest rate hikes, while the European Central Bank may send a small signal in June toward reducing stimulus.
Most analysts polled by Reuters expect the BOJ's next move to be a tightening of monetary policy, though many do not expect it to happen until next year at the earliest.
After three years of heavy money printing failed to drive up inflation, the BOJ revamped its policy framework last September to one better suited for a long-term war against deflation.
(Editing by Sam Holmes)