By Leika Kihara TOKYO (Reuters) – The Bank of Japan is expected to revise its economic forecast slightly upwards for the upcoming fiscal year in hopes that the government’s stimulus package will ease the pain of state of emergency measures to combat COVID-19, sources familiar with his thinking said. In a quarterly review of its projections to be released next week, the central bank also roughly maintains its view that the world’s third-largest economy is heading for a moderate recovery, three sources said on condition of anonymity. After having extended a series of measures last month to ease funding tensions for companies affected by the coronavirus pandemic, the BOJ is expected to suspend the stimulus surge at the Jan.20-21 policy meeting, they said. the sources. However, the central bank is likely to warn of growing risks stemming from new state of emergency measures that are slated to cool consumption, they said. “There is a lot of uncertainty and risks are skewed to the downside. But conditions have not deteriorated enough to review the BOJ’s baseline economic scenario,” said one of the sources, an opinion shared by two other sources. The government said on Wednesday it would expand a limited state of emergency it declared for the Tokyo area last week to seven more prefectures, raising the possibility of another recession for the world’s third-largest economy. While the new restrictions will affect growth from January to March, the BOJ expects robust exports and the effect of the government’s stimulus package to offset some of the pain in the next fiscal year beginning in April, the sources said. In its latest projections released in October, the BOJ expected the economy to expand 3.6% next fiscal year, following an estimated contraction of 5.5% this year. The central bank could slightly cut its forecast for the current fiscal year ending in March, reflecting the impact of renewed emergency measures, the sources said. The October forecast did not take into account the effect of a third $ 700 billion stimulus package launched in December. The government expects the economy to expand 4% next fiscal year due in part to the boost from the stimulus package, much more optimistic than the private sector’s forecast of a 3.3% increase. After suffering its worst post-war contraction in April-June last year due to lockdown measures to combat COVID-19, Japan’s economy has been recovering thanks to strong exports and robust domestic demand for durable goods. Many BOJ officials expect the new restrictions to be less damaging to the economy than the stricter and broader restrictions imposed last year. But some officials are concerned that the state of emergency could extend beyond the current one-month plan and delay growth more than initially expected, the sources said. The state of emergency could affect the BOJ’s deliberation on ways to make its policy more sustainable, including addressing the side effects of prolonged easing, analysts say. The BOJ eased monetary policy twice last year to cushion the consequences of the pandemic, including increasing the purchase of assets and creating a new loan scheme to help companies with liquidity problems. Many BOJ officials are cautious about further relaxation in the short term, as measures to boost demand would run counter to government efforts to keep citizens home, the sources said. As the pandemic prolongs its battle to achieve its elusive 2% inflation target, last month the BOJ decided to conduct a review of its policy framework and announce its findings in March.