The downgrade will reflect the impact of cuts in cellphone charge fees, which analysts say could push down core consumer inflation by as much as 0.6 percentage points.

The BOJ currently expects core consumer prices to rise 0.5% in the fiscal year that began in April.

In fresh quarterly projections due at next week's rate review, the BOJ is also seen projecting inflation to hover around 1% in fiscal 2023, the sources said on condition of anonymity as they were not authorised to speak publicly.

The Nikkei newpaper reported earlier on Tuesday the BOJ will consider slashing its inflation forecast for the current fiscal year.

(Reporting by Leika Kihara; Editing by Chris Reese and Ana Nicolaci da Costa)

By Leika Kihara