UPDATE 1-BOJ seen less bleak on economy, to 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

* Finmin to ask BOJ to support economy this week – Nikkei
(Adds analyst quotes, details)

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. [ID:nT374859]

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

“The government is preoccupied with parliament debate on the
budget and can’t focus on policymaking, which puts an additional
burden on the BOJ in keeping the economy afloat,” said Kyohei
Morita, chief Japan economist at Barclays Capital.

“Deflation continues to plague the economy and if the yen
shoots up again, the BOJ may expand its new funding operation as
early as next month.”

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.

MULLING OPTIONS

The government, now partly preoccupied by a funding scandal,
has toned down its criticism of the BOJ. Finance Minister Naoto
Kan, 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]

But Kan is expected to keep up his pressure on the BOJ and
urge the bank to support the economy through flexible monetary
policy in a speech to parliament this week, the Nikkei newspaper
reported on Tuesday. [ID:nTOE60609M]

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.

For a graphic on global interest rates click:

http://link.reuters.com/xet65h

Investing

(Editing by Hugh Lawson and Edwina Gibbs)

UPDATE 1-BOJ seen less bleak on economy, to keep easing bias