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BOJ to cut this fiscal year's CPI forecast, keep upbeat outlook - sources

A security guard walks out from the Bank of Japan headquarters building in Tokyo April 8, 2015. REUTERS/Yuya Shino

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan is likely to cut its inflation outlook for the current fiscal year next week, but will forecast price growth to roughly reach 2 percent in the following two years, sources said, underscoring the BOJ's conviction that a steady recovery will keep the economy on track to hit the target.

Many BOJ policymakers prefer to hold off on further easing at the April 30 rate review, when they issue new long-term projections that will underline their optimism on the recovery and prospects for hitting their 2 percent inflation target, said sources familiar with the central bank's thinking.The BOJ board members will carefully scrutinise risks before reaching a final decision, though it will take a very big cut in this fiscal year's inflation forecast to trigger action, they noted.

"What's important is that a broad uptrend in inflation, backed by prospects of solid economic growth, is intact," said one of the sources on condition of anonymity.

In the twice-yearly review of its forecasts, the BOJ will slightly cut its core consumer inflation forecast of 1.0 percent for the year to March 2016, taking into account the effect of last year's recession and soft consumption, the sources said.

But the central bank will roughly maintain its 2.2 percent inflation forecast for fiscal 2016 and project around the same level of price growth for fiscal 2017, they said.

Such forecasts will allow the BOJ to justify holding pat even as falling oil prices are seen keeping inflation flat for most of this year, they said.

The board may also discuss watering down the timeframe for hitting the target. The BOJ now says Japan will hit the target at or around fiscal 2015, though Governor Haruhiko Kuroda has acknowledged that it may take somewhat longer than that.

The BOJ has stood pat since expanding its stimulus, dubbed "quantitative and qualitative easing" (QQE), last October to prevent slumping oil prices, and a subsequent slowdown in inflation, from delaying a sustained end to deflation.

Central bankers have since stressed that they will look through the effect of lower oil costs, which are largely blamed for inflation evaporating in February.

They are clinging to the hope that rising wages and increased purchasing power from the lower cost of oil will boost household spending later this year.

But consumption has yet to rebound and firms remain cautious of investing, underscoring doubts held by private analysts that inflation will accelerate as quickly as the BOJ projects.

Analysts polled by the Japan Center of Economic Research, a non-profit think tank, expect core consumer inflation of just 0.35 percent for the current fiscal year and 1.23 percent for fiscal 2016, much lower than the BOJ's estimates.

(Editing by Eric Meijer)