TOKYO — Japan’s economic recovery is expected to remain on track this year thanks to public works projects and strong consumer spending but will slow the following fiscal year due to an expected increase in the sales tax, a Reuters poll showed.

However, consumer prices are expected to fall short of the Bank of Japan’s (BoJ’s) goal, and there is a 60% chance that the central bank could expand asset purchases by the middle of next year, the poll showed.

The world’s third-largest economy is forecast to grow 2.6% in the fiscal year to March 2014, a Reuters poll of 21 economists showed. The survey conducted August 13-16 was little changed from the July poll.

Growth is expected to slow to 0.6% in the following fiscal year as an increase in the sales tax to 8% from 5% planned in April 2014 will slow consumer spending. That compares with a forecast for 0.5% growth from last month’s poll.

"In 2013 government spending and consumption will lead growth, while in 2014 exports and capital expenditure will be the main drivers," said Masayuki Kichikawa, chief Japan economist at Bank of America Merrill Lynch Securities.

"There will be fluctuations due to exchange rates and unemployment, but it’s possible for inflation to reach about 1%."

Japan’s core consumer prices will rise 0.9% for the fiscal year starting April 2014 and 0.9% for fiscal 2015, excluding the effect of an expected sales tax hike, according to the poll.

In comparison, the BoJ’s latest forecasts are for a 1.3% rise and a 1.9% increase, respectively.

The BoJ overhauled monetary policy in April in a bold move to pull Japan out of 15 years of mild deflation.

The central bank’s target is around 2% inflation in about two years, but the gap between forecasts in the Reuters poll and the BoJ’s forecasts shows that economists doubt this target can be meet.

Economists say there is a 60% chance that the BoJ will ease monetary policy further by mid-2014, according to the median from 17 respondents.

Should the BoJ do that, it is likely to increase asset purchases by ¥10-trillion ($102.2bn) and focus its purchases on exchange-traded funds (ETFs), the poll showed.

Under the BoJ’s new policy framework, which it introduced in April, the central bank plans to expand the monetary base by ¥60-trillion to ¥70-trillion per year.

The BoJ pledged to buy ¥50-trillion in government bonds per year, purchase ¥1-trillion of ETFs and ¥30bn in real-estate investment trusts per year.

Reuters