* Pass-through of rising costs not spreading much - BOJ
* BOJ points to upside, downside risks on pace of
* Firms' inflation expectations are heightening - report
* Weak yen generally positive for Japan's economy - report
TOKYO, Jan 19 (Reuters) - The Bank of Japan must be mindful
of the risk that inflation may accelerate faster than expected
if raw material costs continue to spike and prompt more firms to
raise prices, the central bank said in a report on Wednesday.
For now, the pass-through of rising raw material costs to
consumers has been focused on food products and is not spreading
to a broader range of items, the BOJ said in a full version of
its quarterly outlook report.
"That said, there are both upside and downside risks
regarding the extent to which raw material cost increases will
be passed on to the consumer price index (CPI)," the BOJ said.
The BOJ nudged its inflation forecasts on Tuesday but said
it was in no rush to change its ultra-loose monetary policy, as
rising prices fan speculation it may soon signal a shift in its
decade-old stimulus experiment.
In a summary of the report, the BOJ projected core consumer
inflation to hit 1.1% both in the year beginning in April and
the following year - well below its 2% target.
Fierce competition among retailers to lure consumers with
discounts could keep a lid on inflation even as the economy
emerges from curbs to combat the COVID-19 pandemic, the BOJ said
in the full report.
"On the contrary, there is also a possibility that raw
material cost increases will be passed on to CPI more than
expected," the report said.
Recent surveys have shown that companies' inflation
expectations are strengthening and more firms are seeing output
prices increase, the report said, adding the inflation outlook
will depend on how tolerant consumers become of price hikes.
"It is necessary to take into account the possibility that
prices will be pushed up by a faster-than-expected pass-through
of cost increases," it said.
A separate survey showed on Wednesday the inflation rate
consumers expect one year ahead was 2.16% in January, flat from
a seven-year high hit in the previous month.
On the weak yen, the BOJ report said it is likely to
continue having a positive overall impact on the economy, even
though it hurts households by boosting prices of imported goods.
"Regardless of whether the yen depreciates or appreciates,
if the exchange rates change rapidly at a pace that economic
entities cannot keep up with, this may have an adverse impact on
the economy," the report said.
(Reporting by Leika Kihara; Additional reporting by Kantaro
Komiya; Editing by Muralikumar Anantharaman and Kim Coghill)