• Weakness in industrial outlook and exports cloud the outlook
  • Kuroda has said current stimulus is enough to reach target

Bank of Japan officials’ confidence in underlying economic growth is wavering in face of evidence of weakness, making them cautious about the outlook for a pickup in inflation, according to people familiar with the discussions.

For months, BOJ officials regarded a downturn in the economy in the second quarter as a temporary soft patch, with growth and inflation likely to pick up in ensuing months. Now, the outlook may not be so clear, with weakness in industrial output and exports weighing on a rebound, and renewed declines in oil pressuring inflation expectations, according to the people, who asked not to be named because the discussions were private.

Governor Haruhiko Kuroda said on Aug. 26 in New York that recent weakness in production and exports would pass and that, while the central bank was ready to adjust monetary policy if necessary, the current level of stimulus was enough to spur consumer price gains to its 2 percent target. The BOJ chief last October unexpectedly expanded easing to ward off the risk of an extension in a "deflationary mindset" in the wake of a tumble in oil prices.

With Kuroda’s repeated expressions of confidence in a rebound in inflation, some economists in recent months have pared back their expectations for additional monetary stimulus, surveys show. Turmoil in China’s markets, along with domestic weakness, could challenge that shift.

"It’s becoming more difficult for the BOJ to achieve its bullish scenario for the economy and inflation," said Yasunari Ueno, an economist at Mizuho Securities Co. Ueno, who has been among those predicting the BOJ will step up its asset purchases, also said that additional stimulus is unavoidable if the central bank wants to retain its credibility.

The economy is seen shrinking an annualized 1.8 percent in the second quarter from the first three months of the year, revised data are forecast to show on Tuesday.

Data released after Kuroda spoke in late August indicated the economy entered the third quarter lacking momentum.

While retail sales rose for a fourth straight month in July, industrial output and household spending unexpectedly declined and the BOJ’s main inflation gauge slipped to zero percent for a third time this year.

There have also been signs of weakness in inflation expectations.

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