PREVIEW-BOJ seen pausing in its battle against deflation

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

* What: Two-day Bank of Japan policy-setting meeting

* When: Outcome expected April 7, 0330-0500 GMT

* Forecast: Rates steady at 0.1 pct, no new initiatives

By Leika Kihara

TOKYO, April 2 (BestGrowthStock) – The Bank of Japan is expected to
hold fire at its policy meeting next week, but is ready to ease
its ultra-loose policy further in its drawn-out battle with
deflation.

Having just expanded its cheap funds scheme, the central bank
will likely save its limited remaining policy options in case a
spike in the yen or bond yields triggers renewed government calls
for more central bank action.

The government, saddled with the biggest debt in the
developed world and struggling with sliding approval ratings
ahead of a midyear upper house election, has been leaning on the
central bank to help the economy. Japan pulled out of its worst
postwar recession nearly a year ago, but persistent declines in
prices threaten to derail the recovery, hurting consumer spending
and investment.

Discussions at the board will centre on whether strong
factory output and improvement in business morale seen in the
bank’s March tankan survey warrant an upward revision in its
economic assessment. Such a revision could help defuse potential
government pressure and buy the central bank more time.

The debate will serve as a basis for a more comprehensive
review of the economy on April 30, when the bank issues its
long-term economic and price forecasts in a semiannual report.

The BOJ board, which will have former academic Ryuzo Miyao
join as a newcomer to fill one of the two vacancies, is expected
to keep the policy rate unchanged at 0.1 percent. [ID:nTOE62P07R]

Here are possible outcomes:

RATES STEADY, NO NEW INITIATIVES

The BOJ has become more confident about the economic recovery
with growth overshooting its forecast as companies benefit from
strong exports to emerging Asia.

Its March survey supported this view, showing companies were
much less pessimistic and felt less burdened by excess capacity.
[ID:nTOE61E037]

The central bank may underscore such optimism by striking a
more positive note on economic recovery or business sentiment.

A weakening yen and stable bond yields also offer the BOJ
little justification to expand monetary easing at its next
meeting. Government pressure has also subsided after its decision
last month to expand fund supply to the market.

* Probability: Highly likely

* Market reaction: An upbeat economic assessment may briefly
push up money market rates, although price action will be short
lived as market players expect the BOJ to ease policy some time
later this year.

EASE POLICY FURTHER

Despite some bright signs in the economy, few in the BOJ
believe the central bank can stand pat for long with deflation
hurting corporate and household spending.

Some BOJ officials say that having pledged to do its utmost
to beat deflation, the central bank needs to ease policy
pre-emptively before government pressure escalates again.

Consumer price declines have not slowed as much as some BOJ
officials had hoped for despite improvements in the economy.

Moreover, a government decision to scrap public high school
tuition fees is seen shaving around 0.5 percentage point off
annual inflation, possibly reinforcing public expectations that
deflation will persist.

Yen borrowing costs have fallen after the BOJ last month
doubled to 20 trillion yen ($213 billion) the pool of funds
available for its fixed-rate, three-month loans to banks.

The next most likely step is to expand the size of the
operation further or extend the duration of fixed-rate loans to
six months from three months.

Such measures may come as early as April 30 if the yen shoots
up or government pressure for further easing intensifies again,
but are highly unlikely next week, analysts say.

The March 17 decision to expand fund supply has pushed down
the three-month yen Libor rate (JPY3MFSR=: ), which stood at
0.24125 percent on Thursday compared with around 0.25 percent in
early March.

* Probability: Unlikely

* Market reaction: The surprise timing will push down money
market rates and the short end of the bond yield curve,
triggering yen selling.

Stock Market Today

(Editing by Tomasz Janowski)

PREVIEW-BOJ seen pausing in its battle against deflation