TOKYO (Reuters) - The Bank of Japan may expand monetary stimulus next week by pledging to buy exchange-traded funds (ETF) faster than the current pace, if market volatility persists enough to hurt business confidence, sources familiar with its thinking said.
The step will be aimed at preventing the fallout from the coronavirus and subsequent market turbulence from derailing Japan’s fragile economic recovery, the sources said.
But there is no consensus yet on what steps the BOJ should take at the March 18-19 rate review. They will depend largely on what the other major central banks do to support their economies and how markets respond, the sources said.
“It’s among options if purchases approach the 6 trillion yen the BOJ pledges to buy annually,” one of the sources said on condition of anonymity because of the sensitivity of the matter.
The decision is preliminary and subject to change as the BOJ’s nine-member board has yet to engage in full-fledged talks on the desirable next step, they said.
The BOJ has been under pressure to loosen monetary policy as slumping equities, the yen’s spike and jitters over the coronavirus epidemic threaten to curtail corporate investment and derail a fragile economic recovery.
As part of efforts to bolster business confidence, the BOJ may pledge to buy ETFs at more than the current pace of roughly 6 trillion yen per year, the sources said.
The BOJ could also resume purchases of commercial paper to help companies get the funds necessary to weather the coronavirus fallout, some analysts say.
Deepening negative interest rates - another option among the BOJ’s dwindling tool-kit - is considered less likely, since ultra-low rates are already hurting financial institutions, the sources said.
Any such monetary easing step will be accompanied by an expected decision by the BOJ next week to help ease financial strains of smaller firms ahead of the March end of the current fiscal year.
Under a policy called yield curve control, the BOJ guides short-term interest rates at -0.1% and the 10-year government bond yield around 0%. It also buys risky assets such as ETFs as part of efforts to funnel money to the market.
Japan’s economy is on the cusp of recession as the health crisis cancels events and restricts travel, further curtailing already weak consumption.
But many BOJ officials are wary of tapping the central bank’s depleted policy arsenal too soon, because of the rising cost and diminishing return of its remaining tools.
They are also taking a cue from the U.S. Federal Reserve’s emergency rate cut last week, which did little to bolster stock prices, the sources say.
Still, the BOJ is ready to take measures to stabilise markets in line with government efforts to stave off risks from the spreading epidemic, they say.
The European Central Bank’s decision at this week’s rate review is also likely to affect the BOJ’s next move, they say.
Reporting by Leika Kihara, Ritsuko Ando and Takahiko Wada; editing by Larry King