TOKYO The Bank of Japan is likely to give a more upbeat view of the economy at next week's rate review, sources say, as a pick-up in emerging Asian demand and positive signs in private consumption improve prospects for a solid, export-driven recovery.
Any upgrade would reinforce market expectations that the central bank, after failing to jolt Japan out of deflation with years of massive monetary easing, will hold off on expanding stimulus measures in the coming months.
At the previous meeting on Nov. 1, the BOJ said the economic trend was for moderate recovery, but slowing emerging market demand was weighing on exports and output.
Since then, four sources familiar with the bank's thinking said BOJ officials were becoming increasingly confident that global trade was emerging from the doldrums, as factories across Asia and Europe ramped up activity in November.
They also see initial signs of recovery in private consumption, a perennial weak spot in Japan's economy, with service-sector sentiment hitting a nearly three-year high.
At the Dec. 19-20 meeting, the BOJ will thus consider upgrading its language to signal that it is more confident the world's third-largest economy is headed for a steady recovery, the sources said.
"Global economic conditions are improving, and consumption appears to be picking up," said one of the sources. "All in all, we're seeing more bright signs for the economy." Another source echoed that view, pointing out that recent economic indicators had been "mostly positive".
The BOJ's nine-member board will reach a final decision after scrutinising its closely watched "tankan" quarterly business sentiment survey, due on Wednesday, the sources said.
The meeting will not address GDP growth forecasts, which are currently 1 percent for the year ending March 2017, and 1.3 percent for the following year.
(For graphic on Japanese deflation, click tmsnrt.rs/28KmQnX)
Premier Shinzo Abe's "Abenomics" stimulus policies deployed in 2013 initially succeeded in brightening public sentiment and boosting exports, but growth petered out as soft global demand and stagnant wages weighed on exports and consumption.
Though policymakers have topped up fiscal and monetary stimulus, growth and prices have remained stubbornly flat, and critics say the policies are storing up problems for the future.
The BOJ has already revamped its policy framework in September, adopting an approach better suited to a long-term battle against deflation.
It is likely to use a more positive view of the economy to justify standing pat on policy at next week's meeting.
It may also offer a slightly brighter view on overseas economies and private consumption, the sources said.
But BOJ officials are by no means complacent on the outlook.
"There is still a lot of uncertainties in global developments, with big elections in France and Germany coming up in 2017," BOJ Governor Haruhiko Kuroda said last week.
The BOJ is thus likely to reiterate that risks to the economic and price outlook were skewed to the downside, and warrant close attention, the sources said.
Since the BOJ's previous policy meeting on Nov. 1, the yen has weakened roughly 12 percent against the dollar, and Tokyo's Nikkei stock average has gained more than 10 percent.
Japanese manufacturers' confidence rose to a 16-month high in December, a Reuters poll showed, as the weak yen brightened prospects for exporters.
Factory output is also showing signs of life, with Japanese firms' order books rising in November, masking concerns about the protectionist leanings of U.S. President-elect Donald Trump and an oil price rally.
Private consumption, which makes up 60 percent of Japan's economic activity, edged up in the third quarter and winter item sales rose in November on unusually cold weather. The recent stock market rally, triggered by hopes over Trump's policies, may lift sentiment, analysts say.
(Reporting by Leika Kihara; Additional reporting by Sumio Ito; Editing by Will Waterman)