BOJ FOCUS-Despite rosier outlook more easing still on cards

By Leika Kihara

TOKYO, April 13 (BestGrowthStock) – The Bank of Japan’s more upbeat
take on the economy persuaded some investors last week that it
might already be done with monetary easing, but sources say the
central bank is ready to act again in its battle against
deflation.

Central bank officials say economic recovery will not stop
them from relaxing the already ultra-loose policy even further if
they see a risk that the return to price growth may be delayed,
particularly if the yen starts strengthening again.

“Future policy moves will depend largely on financial market
developments, including currency moves,” a source familiar with
the BOJ’s thinking said. Another source expressed a similar view.
Both spoke on condition of anonymity because of the sensitivity
of the matter.

A strong yen hurts exports, Japan’s main driver of growth,
and exacerbates deflationary pressures by making imports,
including energy, cheaper.

The central bank may raise its consumer price forecast for
next fiscal year in its twice-yearly outlook due on April 30 to
show steady prices or a slight increase rather than a 0.2 percent
decline pencilled in now, sources said on Tuesday.

But that would be still well below 1 percent price growth
which both the government and the central bank consider
desirable, meaning more efforts may be needed.

The improved forecast would reflect in part a recent
weakening of the yen and rising costs of commodity imports.

DOWNSIDE RISK

Officials are, however, well aware of a possibility that the
yen could start climbing again and say the least the BOJ can do
is shield the economy from adverse market moves.

“The BOJ might be more upbeat about the economy but that
doesn’t mean it is disregarding downside risks,” a source
familiar with the BOJ’s thinking told Reuters. “If there are
external shocks that need to be dealt with, more action could be
taken.”

Even as recovering exports helped Japan pull out of its worst
recession in decades, demand at home has remained weak, driving
prices down and prompting businesses and consumers to postpone
spending in anticipation that prices will fall even further.

The central bank hopes to lift consumer and business
confidence by showing its determination to fight deflation, BOJ
officials say.

Such a display of resolve would also help accommodate the
government, which took power last year promising to revive the
sagging domestic economy, but with its hands tied by ballooning
debt has leaned on the central bank to do the heavy lifting.

With slumping ratings ahead of an upper house election
expected in July, the government may turn up the heat again on
the BOJ especially if the relief from a softer yen proves
temporary, analysts say.

Last week’s announcement that Prime Minister Yukio Hatoyama
and Governor Masaaki Shirakawa will meet every three months to
discuss the economy was also taken as a sign that the government
was not ready to let the central bank off the hook.

NEXT STEP

Analysts say the most likely next step is for the BOJ to
further expand its low-cost fixed-rate lending to banks, either
by lifting its volume or extending the duration of the loans to
six months from three months.

Analysts point out that the facility was introduced at an
emergency meeting in December when the yen was at a 14-year high
against the dollar and the government was particularly nervous
about the impact on growth and prices.

The central bank expanded the scheme last month, effectively
loosening its policy further, and comments by BOJ officials
suggested that the yen did play a part in that decision.

They say markets reacted in the desired way to the March
decision, driving down money market rates and therefore the
currency.

Some analysts say the fact that the central bank eased its
policy even as in its view the economy was recovering, showed it
would not shy away from more easing if doing so would help bring
forward the end of deflation.

“In the past, markets could assume that the BOJ would not
ease when it described the economy as in good shape. But that is
no longer the case,” said Masamichi Adachi, senior Japan
economist at JPMorgan Securities.

“The word ‘deflation’ does the trick. Just that one word will
justify anything the BOJ does anytime.”
Investing Basics

(Editing by Tomasz Janowski)

BOJ FOCUS-Despite rosier outlook more easing still on cards