FILE PHOTO: Japanese national flag hoisted atop of the Bank of Japan headquarters building is seen between traffic signals in Tokyo, Japan January 23, 2025. REUTERS/Issei Kato/File Photo

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) -The Bank of Japan may next week slightly revise up this year's growth forecast and maintain its view that the economy is on course for a moderate recovery, despite headwinds from U.S. tariffs, said three sources familiar with its thinking.

At the next policy meeting on October 29 to October 30, the BOJ will conduct a quarterly review of its growth and price forecasts.

Recent data, including the BOJ's "tankan" business survey released earlier this month, have led to a growing view within the BOJ that the economy is weathering the hit from higher U.S. levies, the sources said.

Many in the BOJ see domestic economic conditions moving in line with projections made in July, with companies unwavering in their stance to keep increasing spending on expenditure and wages, the sources said.

As such, the BOJ may slightly revise up its economic growth forecast for the current fiscal year ending in March 2026, said the sources, who spoke on condition of anonymity as they were not authorised to speak publicly.

"So far, the economy is on track to meet the BOJ's baseline forecast with the impact of tariffs proving limited," one of the sources said, a view echoed by two more sources.

In current forecasts made in July, the BOJ expects the economy to grow 0.6% in fiscal 2025 and 0.7% the following year.

With domestic economic conditions on track, the timing of the next rate hike will depend largely on how the board views the outlook for overseas economies, particularly the United States, the sources said.

A steep U.S. downturn will hurt Japanese manufacturers and could discourage them from raising wages, threatening to derail a cycle of rising pay and solid consumption that the BOJ sees as a prerequisite for further rate hikes.

"It's a judgment call on how long you want to wait for U.S. data and how to balance external risks against price pressures at home," a second source said.

The BOJ exited a decade-long, massive stimulus last year and raised interest rates to 0.5% in January on the view Japan was on the cusp of sustainably hitting its 2% inflation target.

While inflation has remained above the bank's target for well over three years, the BOJ has kept interest rates steady since then to scrutinise the economic impact of slowing U.S. growth and President Donald Trump's tariffs.

Some hawkish members of the board proposed in September, unsuccessfully, to raise interest rates on the view Japan had already achieved the bank's target and could see price growth overshoot expectations.

(Reporting by Leika Kihara and Takahiko Wada; Editing by Toby Chopra and Kate Mayberry)