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By Leika Kihara
TOKYO (Reuters) - The Bank of Japan is set to keep policy steady on Thursday and upgrade its view of the economy on expectations that a weak yen and its massive monetary stimulus already in place will be enough to offset the hit from slowing Chinese growth.
Many central bank officials are encouraged by bright signs in the economy as the yen's fall to multi-year lows supports exports and the feel-good mood generated by Prime Minister Shinzo Abe's reflationary strategy bolsters consumer spending.
Companies also appear more confident, with data showing core machinery orders, a leading indicator of capital expenditure, rose a bigger-than-expected 10.5 percent in May.
The BOJ's nine board members are expected to discuss concerns about major trading partner China, highlighted by an unexpected fall in exports in June, as they scrutinize risks to the outlook at their two-day meeting.
But the BOJ is still likely to revise up its assessment of the world's third-largest economy for the seventh straight month to signal Japan has achieved, or is close to achieving, a recovery, said sources familiar with the bank's thinking.
That suggests the BOJ will probably hold off on any additional monetary stimulus at least until late October, when it overhauls its economic and price projections, analysts say.
"Japan is now the fastest-growing G7 economy. There's really not much the BOJ is worried about in terms of economic growth," said Kyohei Morita, chief Japan economist at Barclays Capital.
The BOJ is widely expected to keep monetary policy steady by maintaining its pledge to increase base money, or cash and deposits with the bank, at an annual pace of 60 trillion to 70 trillion yen ($600 billion-$700 billion) to meet its target of lifting inflation to 2 percent in two years.
That extraordinary stimulus, which was unleashed in April, and Abe's reflationary policies, known as Abenomics, added momentum to a rally in shares and the decline in the yen.
Financial markets have recently sold off on concerns that the U.S. Federal Reserve may begin to scale back its $85 billion a month bond-buying program as soon as September.
That timetable was thrown into question after Fed Chairman Ben Bernanke said on Wednesday that highly accommodative policy would be needed for the foreseeable future.
The market volatility appears to have had little impact so far on Japan's economy, which emerged from a recession late last year to grow an annualized 4.1 percent in the March quarter.
However, consumer confidence slipped in June for the first time in six months, with a government survey showing households had downgraded their outlooks on livelihood, income, jobs and spending appetite.
On Tuesday, the International Monetary Fund raised its growth forecast for Japan to 2 percent this year on the back of the BOJ's stimulus, its strongest forecast for a G7 nation.
The BOJ board is unlikely to make major changes to the economic forecasts made in a semi-annual review in April, when it saw core consumer inflation accelerating to reach 1.9 percent in the business year ending in March 2016.
That projection, however, is far more ambitious than private-sector forecasts around 1 percent, a sign many analysts doubt there can be a quick exit from 15 years of deflation.
"Compared with private sector economists, the BOJ's views look somewhat bullish, but machinery orders will give the central bank more confidence in its economic outlook," said Hiroshi Miyazaki, senior economist at Mitsubishi UFG Morgan Stanley Securities.
($1 = 101.0650 Japanese yen)
(Editing by John Mair)