By Leika Kihara

TOKYO Japan's government cut this year's economic growth forecast but expects inflation to sharply exceed the central bank's 2% target in new projections released on Thursday, acknowledging growing signs of change in the country's deflationary mindset.

In a mid-year review of its forecasts, the government expects the economy to expand 1.3% in the current fiscal year ending in March 2024, down from 1.5% projected in January. It expects the economy to grow 1.2% in fiscal 2024.

"While slowing exports will likely drag on growth, consumption is seen recovering mainly for services. Capital expenditure is also expected to increase," the government said.

Overall consumer inflation, which does not strip away any item, will likely hit 2.6% this fiscal year, the government said, higher than 1.7% projected in January and exceeding the Bank of Japan's 2% target.

The government expects inflation to hit 1.9% in fiscal 2024.

The estimates come ahead of the Bank of Japan's closely watched policy meeting next week, when the board will produce its fresh quarterly forecasts and debate how much progress the economy is making in sustainably meeting its 2% price target.

In its most recent forecasts made in April, the central bank expects core consumer inflation - which strips away the effect of fresh food costs - to hit 1.8% in the current fiscal year and 2.0% in the following year.

BOJ Governor Kazuo Ueda has brushed aside the chance of a near-term exit from ultra-loose policy, arguing that the recent cost-driven rise in inflation must be replaced by price gains driven more by robust domestic demand and higher wage growth.

(Reporting by Leika Kihara; Editing by Shri Navaratnam)