TOKYO: The Japanese economy is likely to produce sustained inflation of around 2 percent for at least two years from the middle of 2015, the Bank of Japan's latest projections will show, sources familiar with the central bank's thinking said.
The upbeat estimate would underscore the central bank's conviction that Japan is on track to meet its 2 percent price goal by April next year, and reinforce the view that no imminent easing is on the horizon.
Critically, the new projections will see a sustained inflation rate close to the central bank's target, a major step in Tokyo's battle to overcome years of economic stagnation and grinding deflation.
The BoJ's present projection is for core consumer inflation to accelerate to 1.9 percent in fiscal year ending March 2016 from 1.3 percent in the current business year ending in March 2015, excluding the impact of the sales tax hike that kicked off this month.
The new projections, due on April 30, will likely keep the inflation forecast for fiscal 2015 roughly unchanged from the current 1.9 percent.
However, it is also set to estimate fiscal 2016 inflation close to 2 percent, meaning the central bank is for the first time optimistic of achieving sustained price rises over a longer time frame.
The BOJ has become increasingly confident that inflationary pressure will heighten as improvements in the economy narrow the output gap, the sources said. That optimism will be reflected in consumer inflation projections at around 2 percent for fiscal 2015 and 2016, the sources added.
The central bank lays out its long-term economic and price forecasts in a semi-annual outlook report issued in April and October of each year.
The BoJ's optimism is in stark contrast to private-sector analysts, who are more cautious about the price outlook, pointing to sluggish wage growth and the potential pain from this month's sales tax hike on the economy.
BoJ Governor Haruhiko Kuroda has stressed that prices will continue to rise, as diminishing slack in the economy meant more companies will start to boost wages and spending. "The output gap has continued to narrow. Judging from the jobless rate and various data such as the tankan, the gap has approached zero," Kuroda told a news conference on Tuesday.
"Rises in wages and prices, along with improvements in job markets, are broadening and will broaden further. As always, I'm convinced we'll meet our price target," he said.
Kuroda's confident stance comes despite the recent loss of momentum in the world's third-biggest economy, partly as the effects of Tokyo's aggressive monetary and fiscal stimulus policies fade. Even pessimists in the BoJ's nine-member board, like former academic Ryuzo Miyao, are becoming more confident about the economic outlook. Miyao, who has been warning that risks to the economy and prices were tilted toward the downside, on Thursday said they were now roughly balanced.
"I expect inflationary pressure to heighten broadly as a consumption-driven economic recovery continues.
I also expect medium- to long-term inflation expectations to heighten," he told business leaders in western Japan.
Japan's core consumer inflation stood at 1.3 percent in February, matching a five-year high hit in January and December, as robust domestic demand allowed companies to pass on rising costs to consumers.
The jobless rate also fell to 3.6 percent in February, the lowest in more than six years.
Still, the BOJ remains unable to shake off lingering market doubts over its ability to engineer a sustained rise in inflation. Thursday's weak February machinery orders data provided another reminder of the daunting task facing the central bank.
The BoJ has stood pat since launching in intense burst of stimulus in April last year, pledging to double base money via aggressively to accelerate consumer inflation to 2 percent in roughly two years.
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