BOJ FOCUS-BOJ to cut economic forecasts, signal easing bias

* What: One-day Bank of Japan policy meeting

* When: Oct. 28, decision expected 0330-0500 GMT

* Policy likely on hold, issues long-term growth forecasts

* BOJ to revise down econ forecast, predict slow price growth

By Leika Kihara

TOKYO, Oct 25 (BestGrowthStock) – The Bank of Japan is expected to
cut its growth forecast this week and predict a very slow exit
from deflation, signalling it is ready to ease its policy further
in months ahead if the yen’s climb threatens to stunt growth.

The central bank has just eased its policy three weeks ago,
so it looks certain to refrain from new steps when it meets on
Thursday. The focus will thus be on its twice-yearly economic
outlook.

The BOJ is likely to revise down its economic growth forecast
for the fiscal year to March 2012 to around 1.5 percent from 1.9
percent predicted three months ago.

It will also give for the first time its forecasts for the
following year, which will probably project some recovery in
growth and consumer prices rising slightly less than 0.5 percent.

That, however, would be still far from the 1 percent consumer
inflation rate that the central bank wants to see before
considering bringing rates up from near-zero levels.

The Japanese central bank meets just days ahead of the
Federal Reserve’s policy review on Nov. 2-3. The Fed is expected
to pump more money into the economy and the scale of the
operation and its impact on the dollar will largely determine the
BOJ’s further action.

The BOJ, which meets again on Nov. 15-16, will not rule out
easing policy if the Fed’s decision triggers heavy dollar losses
and drive the yen well above its all-time high, said sources
familiar with the Japanese central bank’s thinking.

Such easing would probably come in the form of an expansion
to the planned 5-trillion-yen ($61.46 billion) asset buying
programme.

“Asset buying hasn’t even started. But depending on markets
moves and the state of the economy, increasing the amount is
something to look into,” one of the sources said. Another source
expressed a similar view.

Still, the dollar’s decline and the subsequent yen gains
would need to be big enough to trigger a sharp sell-off on the
Tokyo bourse for the central bank to lean toward easing policy so
soon, the sources said.

Expectations that the Fed will boost its balance sheet more
aggressively than the BOJ have driven the dollar down against the
yen, posing a headache for Japanese policymakers, worried about
the impact on the export-reliant economy.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on Fed, BOJ balance sheets http://r.reuters.com/xyt57p For more stories on the Japanese economy [ID:nECONJP] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Trade data for September on Monday provided more evidence
that the yen’s climb and softening overseas demand were hurting
Japan, with exports dipping month-on-month and annual growth
slowing for the seventh month in a row.

Analysts expect no significant upturn at least until early
next year as the expiration of government subsidies for low
emission cars is set to hit factory output.

“Exports seem to be holding up for now. But there’s no
guarantee shipments to Asia will remain strong enough to offset
weak demand at home. If economic indicators prove weak, the BOJ
may ponder easing in December,” said Hirokata Kusaba, senior
economist at Mizuho Research Institute.

ANAEMIC ECONOMIC, PRICE GROWTH

The BOJ on Oct. 5 pegged interest rates virtually at zero and
pledged to set up a 5 trillion yen asset buying programme.

BOJ Governor Masaaki Shirakawa has said expanding the fund
would be a strong option if the bank opted for more easing.

With the BOJ pledging to keep rates at the bottom until
consumer inflation reaches 1 percent, the size of the pool of
funds available for asset buying will effectively serve as a
gauge of the central bank’s easing.

Its forecasts are expected to underscore how long and slow
Japan’s return to rising prices will be.

Japan’s economy has been caught up in the vicious cycle of
declining prices, weak demand, stagnant output and investment for
over a decade. September figures due on Friday are expected to
show a 1 percent drop in core consumer prices from a year earlier
for the 19th straight month of declines.

At Thursday’s meeting, the BOJ will also outline some details
of its asset buying programme. It plans to begin with government
bond purchases before the end of this year and then move on to
less conventional assets, such as exchange traded funds,
possibly by early next year, sources said.

To encourage more risk-taking, the BOJ plans to buy corporate
bonds rated BBB — the lowest investment-grade bond — and a2
commercial paper, the second tier of this type of short-term
debt, the sources said.
(Editing by Tomasz Janowski)

BOJ FOCUS-BOJ to cut economic forecasts, signal easing bias