BOJ likely to ease, may buy longer-dated JGBs

Thu Apr 26, 2012 6:35pm EDT

Related Topics

* Decision expected around 0330-0530 GMT
    * Policy rate see unchanged at 0-0.1 pct
    * BOJ seen boosting asset buying by up to 10 trln yen
    * BOJ expected to issue semi-annual report 0600 GMT
    * Comments from governor's briefing seen after 0715 GMT

    By Leika Kihara	
    TOKYO, April 27 (Reuters) - The Bank of Japan is likely to
ease monetary policy on Friday by boosting asset purchases and
may also extend the duration of government bonds it buys to
about three years, to show its resolve to achieve the 1 percent
inflation target, sources say.	
    The second easing in just over two months would come despite
growing signs of an economic recovery, suggesting it would be
largely in response to pressure from politicians for bolder
action to beat deflation plaguing Japan for more than a decade.	
    Borrowing costs are already low, with two-year bond yields
trading at BOJ's overnight rate target ceiling at 0.1 percent,
and pumping more money will do little to spur the economy.	
    Any easing will therefore be a symbolic move to show the
BOJ's focus on beating deflation and easing political pressure
for more aggressive action.	
 	
    Financial markets have already priced in at least a 5
trillion yen ($61 billion) increase in the 30-trillion-yen asset
buying scheme.	
    It would take an increase of at least double that amount,
coupled with an extension of the duration of government bonds it
targets to five years, to surprise markets enough to nudge down
the yen and bond yields, analysts say.	
    "An increase of just 5 trillion yen would be interpreted as
a sign the BOJ is not aggressive about easing, and therefore may
trigger a brief rise in the yen and fall in share prices," said
Junko Nishioka, chief economist at RBS Securities Japan.	
    Whether the BOJ will go that far will be a close call.	
    The conservative governor Masaaki Shirakawa will likely
prefer just a 5 trillion yen increase, if at all. But there is
still a chance the BOJ will double the amount if pessimists at
the bank, who do not want to disappoint markets and trigger
another unwelcome yen spike, prevail.	
    	
    1 PCT INFLATION DISTANT	
    With interest rates virtually at zero, the BOJ has created
as its main policy tool a pool of funds to buy government bonds
with up to two years until maturity, as well as corporate debt
and trust funds investing in property and shares.	
    In increasing the fund, the BOJ may extend the duration of
government bonds it buys to around three years and the year-end
deadline for achieving the target by six months, sources
familiar with its thinking have told Reuters. 	
    Any expansion in the programme would come mainly in the form
of government bonds, although there is a slim chance the BOJ may
also pledge to buy more exchange-traded funds (ETFs) depending
on the size of increase, they said on condition of anonymity.	
    The BOJ helped weaken the yen and lift stocks in February by
boosting asset purchases by 10 trillion yen and setting the 1
percent inflation target. But lawmakers have continued to pile
pressure on the BOJ with prices barely rising. 	
    On Friday, the BOJ will also release a twice-yearly outlook
report with revised long-term forecasts that will show Japan
will not see 1 percent inflation for another two years.	
    That will give the BOJ justification to ease policy now
despite growing recent signs that Japan's economy is headed for
a moderate recovery as projected by the central bank.
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