BOJ seen less bleak on economy, may keep easing bias

(For more stories on the Japanese economy, click [ID:nECONJP])

* Rate decision announcement expected 0330-0500 GMT

* Rates seen unchanged, no new initiatives expected

* BOJ seen sticking to forecast for moderate recovery

* BOJ open to further easing in future as growth fragile

By Leika Kihara

TOKYO, Jan 26 (BestGrowthStock) – The Bank of Japan may sound less
pessimistic about the economy on Tuesday but it will likely keep
its bias skewed towards further monetary easing to appease a
government worried about a return to recession in an election
year.

The central bank is almost certain to keep its policy rate
at 0.1 percent and hold off on new policy initiatives at a
two-day rate review ending on Tuesday, having staved off
government pressure with a new funding operation last month.

But it is ready to ease monetary conditions again in future,
such as by buying more government debt, if sharp yen or bond
yield gains threaten an economy barely out of deep recession.

Still, BOJ officials have become more confident that Japan
will avoid another recession, given stronger-than-expected
growth in Asia and receding pessimism over the U.S. economy.

Confidence among Japanese manufacturers has recovered to its
highest level since the financial crisis hit, as strong exports
to Asian markets raised hopes of a global recovery, the latest
Reuters Tankan survey showed. [ID:nTOE60O04G]

In a review of the long-term growth forecasts it issued in
October, the BOJ board is likely to conclude that the economy is
on track for a moderate recovery early next year.

The bank is also seen sticking to its prediction that
deflation will persist for three years, with price falls
expected to moderate over that time.

But with the government still worried about the risk of
another recession in the run-up to upper house elections
expected in the summer, the BOJ may warn of downside risks to
growth, such as weakness in capital spending, and reassure
markets that it will stick to its ultra-easy monetary policy.

The BOJ has been virtually alone in expanding its monetary
easing. The Federal Reserve and the European Central Bank have
said they will start phasing out their emergency lending and
liquidity facilities in light of improvements in credit markets.

For a graphic comparing BOJ’s and the U.S. Fed’s balance
sheets click: http://r.reuters.com/ser34g

After intense government pressure for action, the BOJ last
month adopted a new fund supply operation at which it offers 10
trillion yen ($111 billion) in three-months loans to banks at
0.1 percent. It then declared that it wouldn’t tolerate
deflation.

Yen borrowing costs have since fallen and pulled the yen
(JPY=: ) off a 14-year high against the dollar hit in November.

Three-month LIBOR rates (JPY3MFSR=: ) have fallen below 0.26
percent from around 0.29 percent before the Dec. 1 decision.

The government, now partly preoccupied by a funding scandal,
has toned down its criticism of the BOJ. Finance Minister Naoto
Kan, previously one of the most vocal cabinet critics of the
bank, said on Friday the government shouldn’t meddle in monetary
policy affairs. [ID:nTOE60L084] [ID:nPOLJP]

With little room to cut already low rates, the BOJ hopes to
keep its policy gunpowder dry for when the economy falters and
government pressure on the bank heightens again.

If the yen surges or the economy undershoots its forecasts,
the BOJ may expand the fund supply operation by increasing its
size or offering loans for longer than three months.

Another option is for the BOJ to buy more government debt
than its current 21.6 trillion yen per year, although the bank
wants to avoid this for fear of giving markets the impression it
is monetising public debt.

Governor Masaaki Shirakawa will hold an embargoed news
conference, and his comments are expected to come out around
4:15 p.m. (0715 GMT).

The central bank has pledged to keep rates near zero until
prices start rising again, so most in the market don’t expect
any hikes until early 2012.

Stock Investing

(Editing by Hugh Lawson)

BOJ seen less bleak on economy, may keep easing bias