TOKYO (Reuters) - The Bank of Japan is set to keep monetary policy steady and may raise its assessment on capital expenditure on Wednesday, reassured by growing evidence the economy can withstand the pain from a sales tax hike without additional monetary stimulus.
Governor Haruhiko Kuroda is also expected to reiterate his optimism that Japan is on course to meet the bank's 2 percent inflation target about a year from now, dampening already diminishing market expectations of near-term monetary easing.
Such comments may further strengthen the yen, which held near a 3-1/2-month high against the dollar on Tuesday as hopes of further BOJ action faded, analysts say.
"The BOJ expects consumer inflation to accelerate again in the latter half of this fiscal year from October. We won't know until late this year whether the forecasts are correct," said Noriatsu Tanji, bond strategist at Barclays Securities Japan.
"It makes sense for markets to believe the BOJ won't act for the rest of this year, although I won't rule out the chance of further easing early next year," he said.
At the two-day rate review, the BOJ is widely expected to maintain its monetary policy framework put in place last April, under which it pledges to increase base money by 60-70 trillion yen ($593-$691 billion) per year via aggressive asset purchases.
Japan's economy clocked its fastest pace of growth in more than two years in the first quarter as consumer spending jumped and business investment turned surprisingly strong ahead of the sales tax hike last month to 8 percent from 5 percent.
Some economists and politicians have argued the tax hike could dent the success achieved so far under premier Shinzo Abe through aggressive monetary easing and big fiscal spending.
But there has been growing evidence any damage will be limited. A Reuters survey showed companies expect sales to bounce back and are more willing to raise wages.
Businesses also raised machinery orders by the most ever in March, underscoring the BOJ's view that firms -- many of which saw profits rise thanks to a weak yen and robust domestic demand -- will finally ramp up spending to replace old facilities.
The BOJ may thus offer a more upbeat assessment of capital expenditure than last month, when it said spending was "showing clearer signs of picking up," according to sources familiar with the bank's thinking.
While such upward revision will underscore the BOJ's conviction that it can meet its price target without additional stimulus, Kuroda is likely to stress the BOJ's readiness to act again should risks threaten its optimistic forecasts.
Exports, which hold the key to whether Japan can sustain its recovery, have yet to pick up due largely to soft demand in emerging Asian nations.
Private-sector analysts also remain deeply suspicious about the BOJ's rosy projection on prices, arguing that consumer inflation won't accelerate as quickly as the central bank expects in a country long mired in deflation.
($1 = 101.1700 Japanese Yen)
Editing by Kim Coghill