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BOJ set to refrain from easing, extend loan scheme

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan is expected to refrain from further policy easing at its two-day meeting that starts on Monday, while stressing its readiness to act again in coming months if needed and extending a cheap loan line supporting growth industries.

There is a slim chance the board may debate loosening policy for the second month in a row, with some lawmakers calling for another "big bang" after last month's surprise easing, hoping it would boost stock prices as companies close their books in March.

But the BOJ feels it has done enough for now, with the yen at 9-1/2-month lows, stocks up and euro zone debt jitters receding, sources familiar with the central bank's thinking say.

For the time being, central bankers hopes the loan scheme extension and reaffirmed easing bias will be enough to defuse political pressure for more action, they say.

"Having just eased last month, it would be hard to justify moving again. We expect the BOJ to ease again when the U.S. Federal Reserve boosts monetary stimulus," said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo.

APRIL ACTION EYED

The central bank surprised markets last month by boosting asset purchases by 10 trillion yen ($121 billion) and responded to politicians' calls for more vigorous efforts to pull Japan out of deflation by setting a 1 percent inflation goal.

Last month's easing has been so successful in weakening the yen and bolstering share prices that some lawmakers want more. Having set a specific inflation goal, the central bank remains vulnerable to such calls as long as consumer prices stay steady.

Some market players sold the yen on expectations of more monetary stimulus after Finance Minister Jun Azumi said on Friday he expects the BOJ to take timely steps as bright signs for the economy emerge towards the spring.

Even without politicians' nudging, the central bank now seems more willing to act more often to support a budding economic recovery and achieve the price goal, making its policy action less predictable.

But with output rising, exports seen improving and Greece having averted a disorderly default for now, the BOJ is seen holding fire this month to save its limited policy options.

It may instead make a commitment to further action should the need arise, either in its statement or in Governor Masaaki Shirakawa's post-meeting comments, keeping market expectations alive for another easing as early as in April.

The BOJ is also seen extending a separate 3.5-trillion-yen loan scheme to encourage banks to fund prospective growth industries, created in June 2010 as a long-term effort to boost the economy's growth potential and beat deflation.

Analysts say the plan has limited overall policy significance given its scope, but is another way for the central bank to demonstrate that it is doing all it can to invigorate the sluggish economy.

Of that amount, it is likely to extend by about a year a 500-billion-yen credit line for banks that lend against inventory and receivables as collateral, sources say, as only one-fifth of that amount has been tapped so far.

Many analysts expect the BOJ to offer further monetary stimulus in April, if not this month, by topping up its asset buying scheme, and will scrutinize Shirakawa's comments for clues on the timing and trigger for the bank's next move.

But achieving the target is already becoming difficult. The BOJ needs to buy 20 trillion yen in assets by the end of this year to meet the new 65-trillion-yen target, no easy task as some of its auctions already fail to draw enough bids in a sign it is force-feeding more cash than markets can swallow.

That means the BOJ may need to extend the maturity of government bonds covered by the programme to three-year and five-year bonds if it were to next boost the scheme, some analysts say.

($1 = 82.3550 Japanese yen)

(Editing by Tomasz Janowski)

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