The Bank of Japan is leaning toward holding off on monetary easing on Friday, as an expected government spending package takes some pressure off policymakers to expand an already massive and increasingly controversial stimulus programme.
But moves in the yen and political considerations could easily tilt the nine-member board in favour of expanding stimulus, making the policy decision too close to call, say sources familiar with the central bank’s thinking.
If the BOJ were to ease, it is likely to buy more government bonds, exchange-traded funds (ETF) and other risky assets.
Cutting interest rates deeper into negative territory, which has proved unpopular with the public and the government, is a less likely option, they say.
“It will be a pretty close call. The BOJ may opt to save its options,” said Izuru Kato, chief economist at Totan Research. “Even if it acts, it may do something minor to buy time.”
There is near-consensus in the market that the BOJ will sharply cut its price forecasts and delay the timeframe for hitting its 2 percent inflation target once again, which will give it justification to expand monetary stimulus.
But many policymakers prefer to hold off on easing, hoping that an anticipated fiscal stimulus package and a delay in next year’s sales tax hike will spur growth.
The BOJ will use such a fiscal boost to keep any cut to next fiscal year’s inflation forecast to a minimum, allowing it to argue there is no need for immediate easing.
“As long as inflation is heading toward 2 percent as a trend, a minor delay in hitting the target won’t immediately lead to easing,” said a source familiar with the BOJ’s thinking.
CAUGHT IN A BIND
There is also less conviction among BOJ officials over the benefits of expanding stimulus. Nearly three years of aggressive money printing has failed to push up prices and economic activity remains stubbornly sluggish.
The BOJ is conducting an internal examination of the effects of negative rates, the sources said, underscoring a growing concern within the bank about the rising cost of its policies.
Standing pat, however, would not be without risks.
By failing to meet hyped-up market expectations of radical action, the BOJ risks triggering an unwelcome spike in the yen that could knock Tokyo stock prices and hurt exporters.
“Currency moves are a key part of the equation,” another source said, adding the BOJ may ease if it feels that failing to act could trigger another yen spike above 100 to the dollar.
The dollar shed more than 1 percent to hit 104.21 yen on Tuesday as cautious investors began scaling back expectations of big stimulus steps. The yen has appreciated more than 15 percent against the dollar so far this year.
The government may also pressure the BOJ to ease now to time it with the fiscal stimulus package to be announced early next week, which could maximise the psychological impact on markets.
BOJ Governor Haruhiko Kuroda has ruled out adopting “helicopter money,” or direct underwriting of public debt. But he said there was “nothing wrong” with coordinating fiscal and monetary action to boost the effect on growth.
Regardless of Friday’s move, the BOJ is caught in a bind, said Kato of Totan Research.
“Even if the BOJ eases this time, markets will keep asking for more,” he said. “That’s bad strategy for a central bank left with very few policy tools.”
Source: Reuters (Additional reporting by Sumio Ito; Editing by Kim Coghill)