Bank of Japan Cautious of Easing, but Yen and Politics Could Influence Action – Reuters

By Leika Kihara

TOKYO – Movements of the yen and various political factors are likely to play critical roles for Bank of Japan (BOJ) policymakers faced with the dilemma of whether to implement further stimulus measures on Friday or to conserve their limited policy options in anticipation of potential economic downturns.

A number of central bank officials believe it would be prudent to delay any action, banking on an expected fiscal stimulus package and a postponement of the upcoming sales tax hike to foster growth and enhance the chances of achieving the 2 percent inflation target.

The BOJ intends to leverage the anticipated fiscal boost as a way to minimize potential reductions in next fiscal year’s inflation projections, which could serve to justify a decision against immediate policy easing.

"As long as inflation trends toward the 2 percent mark, a slight delay in reaching that target will not necessitate immediate easing," one insider noted regarding the BOJ’s perspective.

However, various influences might sway the nine-member board’s discussions towards the option of expanding stimulus, resulting in a decision that remains highly uncertain, according to sources.

Market participants largely expect the BOJ to lower its inflation forecasts significantly, shift the timeline for achieving its price targets, and implement further easing measures.

Should the central bank fail to meet heightened market expectations for substantial actions, it could provoke an undesirable rise in the yen’s value, negatively impacting Tokyo’s stock market.

"Currency fluctuations are a crucial aspect of the situation," another source emphasized, suggesting that the BOJ may choose to ease policy if it believes a lack of action could lead to the yen surpassing 100 against the dollar.

Recently, the dollar temporarily fell by 1.7 percent to dip below 104 yen as cautious investors reassessed prospects for extensive stimulus, and it remained around 104.70 yen.

Moreover, the government might urge the BOJ to act now, coinciding with the announcement of a fiscal stimulus package next week to amplify its market impact.

Finance Minister Taro Aso expressed optimism Tuesday, stating he hoped the BOJ would "do its utmost" to achieve its inflation objectives.

CONSIDERING OPTIONS

BOJ Governor Haruhiko Kuroda has dismissed the idea of implementing "helicopter money"—an approach involving direct financing of public debt. However, he indicated that coordinating fiscal and monetary policies could effectively enhance growth.

If the BOJ opts for easing, it is expected to purchase additional government bonds, exchange-traded funds, and other higher-risk assets, sources indicate.

Public and governmental opposition has rendered the option to deepen negative interest rates unlikely, according to insiders.

The BOJ is exploring various easing options, recognizing a growing internal momentum for action, though some board members may dissent against any monetary expansion proposals.

Kuroda has maintained that the BOJ still possesses significant options for further stimulus. However, several board members have publicly questioned the benefits of continued monetary expansion, noting nearly three years of aggressive easing have not successfully spurred price increases.

An internal review of the implications of negative interest rates is underway, reflecting rising concerns about the financial burdens associated with the BOJ’s policies.

Regardless of the decision on Friday, the BOJ is in a challenging position, according to Izuru Kato, chief economist at Totan Research.

"Even if the BOJ takes action this time, markets will continue to demand more," he stated. "This is a precarious position for a central bank with very few policy tools left."