By Leika Kihara and Takahiko Wada

TOKYO (Reuters) -The Bank of Japan is expected to revise down its assessment on consumption and factory output this month, three people familiar with its thinking said, nodding to recent weak signs in the economy that underscore the fragile state of its recovery.

While this could fuel worries about policy outlook, the sources said the BOJ was expected to maintain its forecast that the economy will continue recovering moderately, suggesting the revisions are unlikely to deter it from phasing out its massive monetary stimulus in March or April.

“Consumption isn’t very strong and output is falling due to the auto output disruptions,” one source said. “But there’s no change to the view Japan’s economy is recovering moderately,” the source added, a view echoed by the other two people.

The sources spoke on condition of anonymity as they were not authorised to speak publicly.

The board will discuss the economy’s assessment and its outlook, as well as whether to tweak its ultra-loose policy, at its next meeting on March 18-19.

The BOJ currently describes consumption as “rising moderately” and output as “moving sideways”.

The sources added that the weakness in consumption and output is likely to be temporary and would not derail Japan’s recovery which will be propelled by robust corporate profits and expectations of continued wage gains.

Big firms will settle negotiations on 2025 pay with unions on March 13, ahead of the BOJ meeting on March 18-19. Economists project wage hikes of about 3.9% on average, versus a 3.58% pay rise deal struck in 2023 that was the highest in three decades.

BOJ Governor Kazuo Ueda has said the central bank will focus on the outcome of the wage negotiations, and whether firms will pass on rising labour costs by raising service prices, in deciding how soon it will phase out stimulus.

“While real wages may not immediately turn positive, there’s hope that this year’s annual wage talks will yield solid results that would give consumption a sustained boost,” Ueda told reporters last week when asked about the recent weak data.

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The BOJ typically focuses more on the outlook of the economy, rather than past data, in setting monetary policy.

RECENT DATA

Japan’s economy slipped into recession in the fourth quarter on weak domestic demand, though recent data pointing to strong capital expenditure will likely lead to an upgrade when revised gross domestic product figures are published on March 11.

Factory output fell 7.5% in January from the previous month, the biggest drop since May 2020, due largely to production stoppage at Toyota Motor’s small-car unit Daihatsu.

Household spending also dropped 2.5% in December from a year earlier, extending its decline for a 10th month, due to supply disruptions of cars and continued declines in real wages.

Japan’s government downgraded its view on the economy in February for the first time in three months on sluggish consumer spending, suggesting a bumpy path out of a recession.

Sources have, however, told Reuters that the BOJ was on track to end its negative interest rate policy in coming months on signs companies will continue to offer bumper pay amid a tightening job market.

With inflation exceeding its 2% target for well over a year and prospects of sustained wage growth, many market players expect the BOJ to end its negative interest rate policy by April.

(Reporting by Leika Kihara and Takahiko Wadai; Editing by Himani Sarkar)