Japan plans to cut the amount of inflation-linked bonds it sells to the market next month to the lowest level in seven years, sources said, as plunging oil costs and the economic fallout of the coronavirus pandemic stoke fears of deflation.

The move would underscore the widening impact of the health crisis on the world's third-largest economy, which is on the cusp of a deep recession as the virus forces consumers to stay home and businesses to shut down.

The Ministry of Finance (MOF) originally planned to issue 300 billion yen ($2.8 billion) worth of inflation-linked bonds in a quarterly auction scheduled for May 8.

Given prospects of weaker price growth, the MOF is expected to trim the amount to 200 billion yen, which would be the lowest amount of issuance since 2013, two government officials with direct knowledge of the plan told Reuters on Tuesday.

It would also be half the amount the MOF initially planned to sell when it drafted issuance plans in December last year.

The ministry will make an official decision by the end of this month, after consulting with investors such as commercial banks and securities firms on Thursday, the officials said.

The officials spoke on condition of anonymity as they were not authorised to speak publicly.

The smaller issuance would reflect growing prospects that prices are not likely to rise much, blunting the appeal of inflation-linked bonds designed to help protect investors from inflation.

Core consumer inflation eased in March for the second straight month, data showed last week, underscoring fears that slumping oil costs and soft consumption blamed on the pandemic could push Japan back into deflation.

In easing monetary policy on Monday, the Bank of Japan slashed price forecasts and lowered its assessment of inflation expectations to say they were showing weak signs.

"The global economy is coming under pressure both from shrinking demand and supply constraints. Inflation likely won't rise quickly anywhere," BOJ Governor Haruhiko Kuroda told reporters after the policy meeting.

The BOJ board's fresh core consumer price forecast for the current fiscal year beginning in April ranged from a fall of 0.3% to 0.7%, a sharp drop from a projection for a rise of about 1% made three months ago.

Principal and interest payments of inflation-linked bonds rise and fall with inflation. They become less attractive for investors when prospects of future price rises diminish.

Reuters