The Bank of Japan (BOJ) is expected to forecast this week that inflation will remain below its 2 per cent 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 per cent but fall short of 2 per cent, 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 per cent but the pace will be moderate at best.”

With its 2 per cent 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.

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 per cent 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 per cent,” another source said.

Under projections issued in January, the BOJ expects core consumer inflation to hit 1.1 per cent in the current fiscal year and accelerate to 1.5 per cent the following year.

It also predicts the economy will grow 0.9 per cent this fiscal year and 1.0 per cent the following year.

The BOJ is in a bind. Years of heavy money printing have failed to fire up inflation to 2 per cent 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 ageing 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 analysing the banking system on Wednesday, it said nearly 60 per cent of regional banks could suffer net losses a decade from now if corporate borrowing keeps falling in line with the current trend.

Japanese manufacturers’ business confidence slipped to a 2-1/2-year low in April, a Reuters poll showed, underlining growing concerns the economy could slip into a recession in the face of slowing external demand. The monthly poll, which tracks the Bank of Japan’s (BOJ) closely watched tankan quarterly survey, found the service-sector mood up for the first time in four months, which may help ease some of the pressure on the world’s third-biggest economy.

Manufacturers’ mood is expected to rebound over the coming three months and service-sector morale is also seen edging up slightly, although the pace of recovery appears weak. Subdued business confidence - on top of weakness in factory output and exports - has raised the spectre of a downturn, although BOJ Governor Haruhiko Kuroda has maintained a relatively sanguine view on the economy in a signal that policy will remain steady at next week’s rate-review.

Reuters