By Leika Kihara
TOKYO (Reuters) - The Bank of Japan is likely to offer a bleaker view on factory output at its rate review next week, people familiar with its thinking said, on growing signs that the pain from a sales tax hike in April is denting a fragile economic recovery.
The BOJ's nine-member board may also debate revising down its overall assessment of the economy, although this will be a close call with near-consensus among the policymakers that as a trend, a positive economic cycle remains intact.
Last month, the BOJ said industrial output is making weak movements but continues to rise moderately as a trend.
At its rate review next week, the central bank is seen revising down that view to reflect a surprise plunge in factory output in August, the sources said on condition of anonymity.
Industrial output fell 1.5 percent in August to the lowest level since 2013, data showed on Tuesday, as companies cut production after having been saddled with a huge stockpile of inventory due to sluggish demand after April's sales tax hike to 8 percent from 5 percent.
Household spending also remained weak, leading some BOJ officials to believe it will take longer than expected for the economy to emerge from a severe post-tax hike slump.
"The recovery from the sales tax hike is being somewhat delayed," Ko Nakayama, head of the BOJ's economic statistics division, told reporters on Wednesday after the bank's "tankan" survey showed big service-sector firms' sentiment worsened for two straight quarters.
While BOJ officials feel the economy continues to recover as a trend, many of them acknowledge that the tax hike, as well as unusually bad summer weather, had taken a heavier toll on the economy. Many had initially hoped the tax hike pain would ebb by September.
The BOJ board is thus likely to engage in heated debate on whether it should tweak its current economic assessment to signal the growing likelihood of a delay in recovery.
The central bank now says the economy "continues to recover moderately as a trend, although the effect of the tax hike remains."
At the Oct. 6-7 meeting, the BOJ is likely to keep monetary policy steady on the view that despite some weaknesses, the economy is still set to resume a moderate recovery.
(Reporting by Leika Kihara; Editing by Richard Borsuk)