PREVIEW-BOJ may debate poll fallout, revise up econ forecast

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

* What: Two-day Bank of Japan policy meeting

* When: July 14-15, announcement due July 15 0330-0500 GMT

* Forecast: Policy rate steady at 0.1 pct

* BOJ to revise up economic forecast for year to March 2011

By Leika Kihara

TOKYO, July 13 (BestGrowthStock) – The Bank of Japan may debate how
the policy stalemate created by the ruling party’s defeat in
upper house elections could affect the economic outlook, but
will stand pat on policy this week with the yen off its recent
peak.

The central bank is also set to revise up its economic
forecast for the current fiscal year, but stick to its cautious
view on the outlook given anxiety over Europe’s debt problems
and signs of a U.S. economic slowdown. It is widely expected to
keep its policy rate at 0.1 percent.

The BOJ issues long-term economic forecasts in April and
October of each year, and reviews them in January and July.

Here are possible outcomes of the rate review:

NO MONETARY EASING, REVISE UP ECONOMIC FORECAST

Probability: Highly likely

Europe’s debt problems and the ensuing market turmoil have
heightened uncertainty over the outlook, but not enough to
ponder imminent action, BOJ officials say.

That is more so with the yen now near 89 yen to the dollar,
off its seven-month high of 86.96 yen hit on July 1, providing
relief for the export-reliant economy.

The BOJ will probably stick to its projection of a moderate
recovery supported by solid exports to Asia. It is expected to
forecast economic growth of around 2.5 percent in the year to
March 2011, up from the April estimate of 1.8 percent, sources
said. [ID:nTOE66100G]

The central bank is not expected to revise substantially
the 2.0 percent growth forecast for next fiscal year, starting
in April 2011, or its price forecasts.

Market reaction: Price action will be subdued as markets
expect no policy change.

HINT OF ROOM FOR EASING, WARN AGAINST MARKET VOLATILITY

Probability: Unlikely

While the June tankan business sentiment survey showed a
slow recovery was taking hold in Japan, sharp yen gains earlier
this month added to uncertainty for an economy already facing
slowing factory output and rising inventories.

The BOJ may therefore tone up its warning of the risk of
Europe’s sovereign debt risk and market volatility hurting
Japan’s fragile economy. But the chance of this happening has
decreased with financial markets having stabilised lately.

Market reaction: Any hint of further easing may push down
money market rates and the short end of the bond yield curve.

EASE POLICY FURTHER

Probability: Highly unlikely

Easing policy might have been an option if the yen
continued to surge toward the 14-year high hit in November. But
with the yen having weakened, the BOJ is comfortable standing
pat for now.

The ruling party’s drubbing in Sunday’s upper house
election is a setback for government efforts to rein in Japan’s
huge public debt, already twice the size of its economy.

BOJ board members may discuss how the policy deadlock could
affect the economy, although the governor usually does not
comment much on politics in his post-meeting news conference.

With its hands tied on fiscal policy, the government may
lean on the BOJ to support the economy if sharp yen gains and
slowing global growth threaten the fragile recovery.
[ID:nTOE66C005]

The BOJ therefore will save the few options it has left for
when that actually happens.

Market reaction: The surprise move would push down money
market rates and the short end of the bond yield curve,
triggering yen selling.
(Editing by Tomasz Janowski)

PREVIEW-BOJ may debate poll fallout, revise up econ forecast