BOJ FOCUS-BOJ may ponder easing in September, but not now

* No easing steps likely before September despite speculation

* BOJ lining up options before Sept 6-7 policy meeting

* Fund supply move most likely despite doubt on effectiveness

By Leika Kihara

TOKYO, Aug 19 (BestGrowthStock) – The Bank of Japan may consider
easing monetary policy next month and is lining up its options,
but is in no mood to act now despite speculation that persistent
yen gains may nudge it to act before its September rate review.

Markets are rife with speculation that the BOJ, in an attempt
to pre-empt government pressure for action, may loosen its
already-easy monetary policy at an emergency meeting before or
shortly after Monday’s expected meeting between Governor Masaaki
Shirakawa and Prime Minister Naoto Kan.

But the central bank is unlikely to act before its Sept. 6-7
policy meeting, unless the yen heads towards its all-time high
above 80 to the dollar at a pace of 2 to 3 yen in a single day,
sources said.

Still, consensus is building within the BOJ that it may need
to consider easing policy further in September to join government
efforts to compile a package of steps to ease the pain from the
strong yen for the slowing economy.

Shirakawa is hesitant about further action, on the view that
the economy is on track for a moderate economic recovery. But
that may change as the strong yen and slowing U.S. and Chinese
growth inflict clearer damage on the economy.

Following are some policy options for the BOJ:

EXPAND FUND SUPPLY TOOL

Possibility: Most likely

The BOJ set up a funding scheme in December and expanded it
in March under which it offered up to 20 trillion yen ($234.5
billion) in three-month loans at 0.1 percent. The decision to set
up the scheme was made at an emergency meeting held a day before
Shirakawa met with then-Prime Minister Yukio Hatoyama.

That failed to boost bank lending, which marked its eighth
straight month of annual falls in July. But it helped to push the
yen further away from the November high.

Increasing the amount of funds available, or extending the
duration of loans to six months, could push down interbank
lending rates and indirectly weaken the yen, analysts say.

Sceptics at the BOJ argue that the yen’s drivers are
different now than they were in December. Investors now view the
yen more as a safe haven and are not focusing on short-term
interest rate differentials like they were in December.
Therefore, lowering money market rates this time might not have
the impact it had in December.

“It’s an option but it won’t work both in terms of affecting
currency moves and supporting the economy,” said a source
familiar with the BOJ’s thinking.

Still, it’s among the favourite options within the BOJ as it
is easier to implement than other more aggressive measures.

The move would be more of a token gesture to show the central
bank was doing what it could to support the economy.

Market reaction: It would have little impact on money market
rates and the yen as such a move is already widely expected in
the markets.

BUY MORE GOVERNMENT BONDS, ASSETS

Possibility: Likely

This is a less attractive option for the BOJ, which worries
that increasing government bond purchases from current levels of
21.6 trillion yen per year could give the impression it was
directly financing government spending.

Although 10-year bond yields have already dipped below 1.0
percent, buying more bonds could be a more effective way to
support growth as long-term yields still have room to fall.

Additional buying could also weaken the yen by showing
markets its determination to expand fund supply, analysts say.

Market reaction: Bond yields might briefly fall, subsequently
pushing down the yen. But there could be a danger of yields
rising if markets felt Japan was losing control over its debt.

STRENGTHEN COMMITMENT TO EASY POLICY

Possibility: Less likely

If the government steps up pressure on the BOJ to ease policy
further it may cave in to lawmakers’ calls to set a more rigid
inflation target and commit itself to do more to beat deflation.

But this is highly unlikely for now, as Shirakawa is against
setting a strict price target for fear of binding future monetary
policy, BOJ officials say.

The BOJ may instead opt for a vaguer commitment, such as
pledging to keep rates low until Japan is comfortably out of
deflation. The Federal Reserve’s stated commitment to keep rates
low for an “extended period” could be an example, analysts say.

The challenge would be to make the pledge clear enough to be
effective, but vague enough to leave policy options open.

Market reaction: Two-year bond yields, most sensitive to
monetary policy, might fall. But the move could be short-lived as
such a commitment is effective when markets are starting to
factor in the chance of a rate hike, which is not the case now.

REVERT TO QUANTITATIVE EASING, ZERO RATES

Possibility: Highly unlikely

The BOJ already floods markets with cash as it did during its
five-year quantitative easing policy until 2006. It now targets
interest rates, whereas under its quantitative easing policy it
targeted liquidity.

But it is strongly against reverting to a formal quantitative
easing policy with a liquidity target, as it feels the policy did
little to boost the economy or beat deflation.

Achieving a liquidity target would also be tougher now as
banks are in less need of funds than they were early this decade,
when Japan was mired in a severe credit crunch, BOJ officials
say.

Cutting the policy rate to zero from 0.1 percent is also
among the least favourable options, as it would discourage banks
from trading in the money market and make it hard for the BOJ to
guide short-term rates.

Market reaction: The shift would come as a surprise and
sharply push down money market rates, bond yields and the yen.

UNSTERILISED CURRENCY INTERVENTION

Possibility: Highly unlikely

If Japan were to intervene in the market to stem yen gains,
the BOJ may decide not to drain the yen sold out to the market,
some traders say. This unsterilised intervention would leave
extra yen in the market, effectively a form of monetary easing.

The government may urge the BOJ to take this approach if it
were to intervene, although the chance of Tokyo stepping into the
market is low for now. The United States and Europe have little
reason to support Japan’s efforts to curb yen gains, and solo
moves by Tokyo are seen having a limited effect on the markets.

Market reaction: The surprise move may briefly weaken the yen
although its impact would be short-lived.
(Editing by Edmund Klamann)
($1=85.30 Yen)

BOJ FOCUS-BOJ may ponder easing in September, but not now