BOJ to keep bullish inflation outlook

TOKYO, Aug 26 (Reuters): The Bank of Japan (BOJ) is likely to keep its bullish inflation outlook even as it cuts its economic growth forecast for this fiscal year in an October report, sources said, suggesting that the bank will not ease policy further at least until the end of 2014.

But central bankers are hardly complacent as they remain concerned about the outlook for exports, a soft spot in the economy that has failed to pick up despite the boost from a weak yen that gives Japanese goods a competitive advantage overseas.

Japan's government kept its economic assessment unchanged at its monthly report on Tuesday, saying the world's third largest economy is "expected to recover moderately" as the effect of a sales tax hike in April eases gradually.

But it turned slightly more cautious about factory output, which in June posted its biggest decline in more than three years due partly to weak overseas demand.

Japan's economy contracted a hefty 6.8 per cent in the second quarter due largely to the tax-hike pain, prompting many private-sector analysts to downgrade their growth forecasts for the year ending in March to around 0.5 per cent, just half the 1.0 per cent expansion estimated by the BOJ in July.