By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - The Bank of Japan projected on Tuesday that inflation will fail to reach its 2% target during its governor's term through early 2023, as fresh curbs to combat a spike in COVID-19 cases overshadow the boost to growth from solid global demand.
While the central bank kept policy steady, Governor Haruhiko Kuroda signalled his readiness to extend a pandemic-relief programme beyond the current September deadline, as slow vaccine rollouts and a spike in new virus strains hit retailers.
"If some service sectors remain under strong funding stress, we will of course consider extending the programme," he told a news briefing, warning of uncertainty over the economic outlook.
Japan last week declared a third state of emergency for Tokyo, Osaka and two other prefectures to contain the pandemic, clouding prospects for a fragile recovery.
In a quarterly report released after Tuesday's rate review, the BOJ revised up its growth forecasts and stuck to its view the world's third-largest economy would recover as robust U.S. and Chinese demand underpins exports.
"Japan's economy is seen growing further as the pandemic's impact subsides and a positive cycle strengthens," where rising household income boosts spending, the report said, pointing to a gradual, post-COVID normalisation of economic activity.
But the BOJ cut this year's price forecast and predicted for the first time that inflation would stay well short of its 2% target beyond Kuroda's term, which ends in early 2023.
"It's true that under the current forecasts, inflation won't reach 2% even in fiscal 2023. That means achievement of our 2% target will be beyond fiscal 2024," Kuroda said.
CELLPHONE FEES BLAMED FOR DOWNGRADE
As widely expected, the BOJ maintained its short-term interest rate target at -0.1% and that for 10-year bond yields around 0%.
The BOJ trimmed its core consumer inflation forecast for the fiscal year that began in April to 0.1% from 0.5% estimated in January.
The central bank projects inflation to accelerate to 0.8% in fiscal 2022 and 1.0% the following year, the report showed.
"What's notable was the BOJ's cautious price outlook through fiscal 2023," said Takashi Miwa, chief economist at Nomura Securities.
"It suggests the BOJ will have no choice but to continue its ultra-loose policy even after Kuroda's current term ends."
Kuroda blamed the cut to this fiscal year's inflation forecast on the effect of cellphone fee cuts, which he said likely shaved around 0.5-1 percentage point off price growth.
When excluding such transitory factors, consumer inflation is moving on a "firm note," the report said, suggesting that weak headline numbers alone won't trigger additional easing.
Japan's economy has emerged from last year's slump on robust exports, though slow vaccine distribution and a resurgence in infections have dampened consumption.
A growing divergence between manufacturers benefitting from solid global demand, and service-sector firms reeling from state of emergency curbs, is complicating the BOJ's efforts to support the economy with a dwindling policy tool-kit.
Eight years of stimulus attempts by Kuroda have also failed to fire up inflation to his 2% target, with core consumer prices having fallen for eight straight months in March.
The BOJ conducted a review of its tools in March to make them sustainable enough to weather an expected prolonged battle to fire up inflation.
(Additional reporting by Tetsushi Kajimoto; Editing by Sam Holmes and Jacqueline Wong)