* Bank of Japan decision expected around 0330-0530 GMT
* BOJ seen expanding asset purchases by Y10 trln
* No conclusion likely on setting higher price target
* Comments from governor’s briefing seen after 0715 GMT
By Leika Kihara
TOKYO, Dec 20 (Reuters) – The Bank of Japan is expected to
deliver its third dose of monetary stimulus in four months on
Thursday in a prelude to more aggressive action next year, as it
faces intensifying pressure from the country’s next leader for
stronger efforts to beat deflation.
Shinzo Abe, whose opposition Liberal Democratic Party (LDP)
won Sunday’s election by a landslide, has put the central bank’s
independence on the line by repeatedly calling for a binding 2
percent inflation target, double its current price goal.
The central bank may start debating its response, but an
adoption of a new price target will not come until January as
Abe has yet to be formally confirmed as the next prime minister.
Abe has said once he forms a cabinet on Dec. 26 he will
instruct his ministers to begin working with the BOJ on setting
a shared inflation target.
That means for now, the BOJ will likely stick to its
existing framework of expanding its 91-trillion-yen ($1
trillion) asset buying and lending programme, probably by 10
trillion yen, analysts say.
“With business sentiment worsening, the BOJ has no choice
but to loosen policy again,” said Junko Nishioka, chief Japan
economist at RBS Securities, adding that anything below a 10
trillion yen increase in asset buying could nudge up the yen and
push down Tokyo share prices.
“I don’t expect anything concrete to come out on the
inflation target debate. Any big change in the BOJ’s policy
framework may have to wait until the central bank has a new
governor in April,” she said.
Markets have already priced in BOJ action on Thursday, with
14 out of 19 economists polled by Reuters last week expecting
further easing via an increase in asset purchases.
The BOJ set a 1 percent inflation target in February and has
boosted asset purchases four times so far this year, including
in September and October, to ease the pain from weakening global
demand on the export-reliant economy.
It last eased policy for two straight months in 2003, when
it nudged rates to zero and pumped cash aggressively to battle
deflation under its previous quantitative easing policy.
PONDERING ACTION
Some in the BOJ, particularly officials close to the
conservative Governor Masaaki Shirakawa, want to delay any
action until January, when there is more clarity on the new
government’s policies and when the central bank conducts a
quarterly review of its long-term growth projections.
But that may be too costly with business sentiment already
slumping and companies delaying capital spending plans on weak
global demand, adding to evidence that any rebound from
recession early next year will be minor, analysts say.
Abe made a rare, direct push for a higher inflation target
when Shirakawa visited the LDP’s headquarters on Tuesday, saying
that the central bank must pay heed to the fact that he won an
election campaigning for bolder monetary stimulus.
The LDP and its coalition partner, the New Komeito, together
won a two-thirds majority in the powerful lower house that would
allow them to overrule parliament’s upper house in most matters,
including on any bill to revise the law guaranteeing the central
bank’s independence from government interference.
Abe, which plans to compile a big stimulus package to revive
the economy, may use that threat to nudge the central bank into
buying bonds more aggressively to finance the costs.
Central bankers are lining up future options such as
expanding the type of risky assets it buys, investing in an
LDP-proposed fund to buy foreign bonds to weaken the yen or
buying government bonds more aggressively to fund Abe’s fiscal
stimulus plans.
Investors with be watching Shirakawa’s post-meeting news
conference closely to see how he responds to Abe’s calls for a
higher inflation target.
Shirakawa has consistently argued that setting a 2 percent
inflation target would be counter-productive in a country that
has not seen consumer inflation exceed 1 percent for most of the
past two decades.
On Thursday, the BOJ will also announce details of a new
loan programme unveiled in October to supply banks with cheap
long-term funds without limiting the amount of cash made
available.
