The Bank of Japan is expected keep monetary policy on hold and present a brighter view on the economy on Tuesday, encouraged by a rebound in factory output and increasing signs that the recovery from the devastating March earthquake is broadening.

But it may issue a stronger warning about the health of the global economy as a series of weak Chinese and U.S. economic data fueled concerns that exports may get less support from global demand just when Japan is overcoming supply constraints.

The central bank will also cut its economic forecast for the current fiscal year in a quarterly review of its growth projections, although this would be a technical revision reflecting a steep contraction in first-quarter GDP.

China and Europe are in monetary tightening mode while the U.S. economy appears weak. The key would be how the BOJ views the global economic outlook, said Takeshi Minami, chief economist at Norinchukin Research Institute.

We know Japanese output will rebound to pre-quake levels by autumn. The question is what happens after that.

The BOJ is widely expected to keep its benchmark interest rate steady at a range of zero to 0.1 percent by a unanimous vote and hold off on loosening policy further.

While the global slowdown is a concern, it would take a renewed spike in the yen or a steep stock price fall to nudge the central bank into easing policy in the near term.

Still, the BOJ will maintain its easy monetary policy bias and stress its readiness to loosen policy further if Japan's recovery prospects come under threat, analysts say.

Japan's economy likely contracted for three straight quarters through June but is expected to grow 1.0 percent in the third quarter, a Reuters poll showed, as companies make progress restoring supply chains hit by the March disaster.

Factory output jumped by the most in almost 60 years in May while business and consumer sentiment showed signs of recovery from the quake's damage, underscoring the BOJ's view that the economy will resume a moderate recovery in autumn.

The BOJ will likely revise up its assessment from last month, when it said the economy appeared to be picking up but remained under downward pressure mainly on output, said sources familiar with the central bank's thinking.

That will reinforce market expectations that no immediate easing is in the horizon, although the BOJ is hardly optimistic about the outlook.


Some in the BOJ have become increasingly worried about softening global growth which, if prolonged, will hurt exports just when supply constraints ease in the autumn.

U.S. jobs growth ground to a near halt in June, dashing hopes that the world's largest economy was emerging from a soft patch, while annual inflation in China accelerated to a three-year high, signaling that more tightening may be needed in the second-largest economy even as growth slows.
signaling The BOJ does not expect the global slowdown to turn into a recession that would hurt exports severely enough to threaten Japan's recovery. But it may warn of heightening risks to the global economy.

The central bank is expected to cut its economic forecast for the current fiscal year that began in April from the 0.6 percent growth projected three months ago. The new estimate is seen roughly in line with a Reuters poll of economists pointing to 0.3 percent expansion.

But this would be a technical revision reflecting the steep contraction in January-March GDP and revisions to last year's figures, and would not affect monetary policy or the central bank's view of the economy.

The BOJ may slightly revise up its economic forecast for the following fiscal year from 2.9 percent growth projected in April, although any change will likely be minor.

No major change is expected to the BOJ's projection of 0.7 percent core consumer inflation for both years, although a change in the data's base year in August will likely lead to a sharp downward revision down the road.

Reflecting a recent easing in commodity costs, wholesale prices fell 0.1 percent in June from May.

The central bank issues its long-term economic and price forecasts in April and October of each year, and reviews them in January and July.

The BOJ has stood pat on policy since easing credit just days after the March disaster by topping up a pool of funds used to buy assets ranging from government bonds to corporate debt.

(Reporting by Leika Kihara; Editing by Edmund Klamann)