TOKYO—The Bank of Japan's policy board, under growing political pressure, is expected to consider fresh easing measures at its coming meeting after concluding that its goal of reaching a 1% rise in prices is more than two years away, according to people familiar with the bank's thinking.
The BOJ is due to release its initial forecast for the fiscal year beginning April 2014 at the Oct. 30 meeting in its semiannual outlook report on the economy and prices. The forecast is expected to show that the economy will fail to meet the 1% inflation goal the central bank considers the benchmark for indicating that Japan is finally leaving behind nearly 20 years of deflationary pressure.
"While there hasn't been much bright news in the past month, some additional negative factors have appeared, such as lowering production activity in China," one of the people said. "Sentiment has worsened sharply."
BOJ Gov. Masaaki Shirakawa acknowledged in October that the bank had downgraded its view on prices when it decided to increase the size of its asset-purchase program by ¥10 trillion ($126 billion) in September. Previously, Mr. Shirakawa had said he expected 1% inflation would kick in some time after the April start of the 2014 fiscal year.
In its interim review issued in July, the BOJ said it expected core CPI to rise by 0.7% in the fiscal year starting April 2013.
In a rare revelation of the tug-of-war between the government and the central bank over monetary policy, a former junior cabinet minister said Thursday he had specifically told the policy board the inflation target should be strengthened, but the idea had largely been ignored.
Katsuyuki Ishida, a vice economy minister until earlier this month who attended the Bank of Japan's policy board meetings as a government representative, said he told BOJ officials on the sidelines of one of the gatherings to toughen the language on its 1% inflation goal.
"They say it's an inflation 'goal,' but the wording isn't clear," Mr. Ishida, who left the post in a cabinet reshuffle this month, said in an exclusive interview. "I suggested that the board step up its language so that everyone would agree it's a 'target.'"
Despite the added political pressure for the BOJ to act, other signs appear to suggest the bank could stand pat.
The strong yen, a source of concern since it acts as a brake on exports, has lately been weakening slightly, which in turn is helping stocks turn higher. BOJ officials have said that even though they don't target these areas in formulating policy, they are still watched for their impact on the broader economy.
The yen has been falling in recent days amid signs of a recovering U.S. economy, pushing the dollar above the ¥79 level for the first time since Aug. 22. Tokyo shares are moving higher, meanwhile, posting a 2% gain Thursday.
Still, missing the inflation goal will likely increase political pressure to loosen monetary policy further, especially as the government also started to make its own renewed efforts to revive the nation's economy.
Prime Minister Yoshihiko Noda ordered his cabinet on Wednesday to draft an economic stimulus package. He needs to show the economy is healthy enough to withstand a planned increase in the national sales tax, a measure that is a critical part of his plan to improve the country's grim fiscal state.
If the central bank were to act, increased purchases of exchange-traded funds and real-estate investment trusts would likely be on the table. Recent additional moves have been focused on the purchase of Japanese government bonds, which make up the bulk the ¥80 trillion program.
The BOJ has already bought such risk assets to near the upper limit under the program. As of Oct. 10, it held ¥1.416 trillion of ETFs and ¥102 billion in J-REITs, compared with ceilings of ¥1.6 trillion and ¥120 billion, respectively.
