The Bank of Japan will probably forecast this week that deflation will extend into fiscal 2011, an indication that borrowing costs are likely to stay near zero.
Consumer prices excluding fresh food, the BOJ's preferred gauge of inflation, will tumble 0.5 percent in the year starting April 1, 2011, and economic growth will accelerate to 1.2 percent, according to the median estimate of 15 economists surveyed by Bloomberg. The BOJ will release its semiannual outlook at 3 p.m. Friday.
Policymakers will say in the report they plan to keep the benchmark interest rate low to foster the nation's recovery from its worst postwar recession, analysts predict. That commitment, against the backdrop of forecasts for entrenched deflation and a fragile recovery, will quell any investor speculation that the BOJ's unwinding of its emergency credit measures will lead to a rate increase, said Masaaki Kanno.
"The BOJ will probably highlight that consumer prices will be stuck in negative territory and use that to convince investors that a rate hike is still far, far away," said Kanno, a former BOJ official and now chief economist at JPMorgan Chase & Co. in Tokyo.
Eleven analysts said the bank will say this week it plans to stop buying commercial paper and corporate bonds from lenders in December as scheduled because firms are finding it easier to obtain credit.