TOKYO (Reuters) - Bank of Japan policymakers will debate the feasibility of ramping up already massive stimulus on Thursday but are expected to save their limited ammunition for a while longer, despite growing risks to the country’s fragile economic recovery.
While the BOJ is expected to reiterate its readiness to act if needed to shore up growth, a weak yen may take some of the pressure off to immediately follow other major central banks which are easing policy, analysts say.
On Wednesday, the U.S. Federal Reserve cut interest rates again to sustain a record-long economic expansion and insure against risks such as weak global growth and resurgent trade tensions.
At its two-day meeting ending on Thursday, the BOJ is widely expected to maintain a pledge to guide short-term interest rates at -0.1% and the 10-year government bond yield around 0%.
It is also seen keeping intact its pledge to buy assets, including a loose commitment to increase its government bond holdings at an annual pace of 80 trillion yen ($739.51 billion).
“With market sentiment improving, there’s not much merit for the BOJ to act in September,” said Tomoyuki Shimoda, a former Bank official who is now an economics professor at Hitotsubashi University.
“The BOJ will ease when market conditions sour again and heighten calls for bigger steps to spur growth,” he said.
“Until then, the BOJ will keep its gun powder dry.”
Even if the BOJ decides to hold fire, Governor Haruhiko Kuroda will likely stress the bank’s readiness to ease swiftly to fend off shocks to the economy, analysts said.
Kuroda will hold a news conference to explain the BOJ’s policy decision at 3:30 p.m. (0630 GMT).
Market expectations of imminent easing grew after the BOJ pledged in July to act pre-emptively to fend off risks that could knock the economy off the path towards achieving its elusive 2% inflation target.
BOJ officials have said solid domestic demand is offsetting some of the weakness in exports, helping the economy sustain a moderate expansion.
But waning hopes for a near-term rebound in global growth, and concerns about the impact a domestic sales tax hike in October, are making BOJ policymakers more open to discussing expanding stimulus, sources say.
Exports fell for a ninth straight month in August, while business morale hit the weakest level in 6-1/2 years. Disinflationary pressures are also on the rise again with surveys showing companies have cut selling prices for three straight months in a bid to salvage orders.
“When you look at the global economy, factors the BOJ need to worry about keep increasing,” said Shigeto Nagai, head of Japan economics at Oxford Economics. “It would be hard for the BOJ to be too optimistic about the global outlook.”
Cutting interest rates deeper into negative territory will be the key option when the BOJ next acts, although the central bank may accompany that with measures to mitigate the pain on financial institutions, sources have told Reuters.
At Thursday’s meeting, the BOJ board may also discuss ways to address excessive declines in long-term rates that threaten the bank’s policy aimed at controlling the yield curve.
Its current policy - dubbed yield curve control - was introduced partly to prevent the yield curve from flattening too much, as excessive declines in long- and super long yields will erode profit margins of financial institutions.
But there may little the BOJ can do beyond reducing bond buying or issuing stronger warning against sharp yield falls, analysts say.
Reporting by Leika Kihara; Editing by Kim Coghill