Japan central bank set to vow boldest action yet to lift economy

Mon Jan 21, 2013 4:00pm EST

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* BOJ decision could be announced around 0300-0530GMT
    * Govt, BOJ to issue joint statement to share new target
    * Expected to double inflation target to 2 percent
    * BOJ may mull options beyond increase in asset buying
    * Comments from governor's briefing seen after 0715GMT

    By Leika Kihara
    TOKYO, Jan 22 (Reuters) - The Bank of Japan is set on
Tuesday to unveil its most determined effort yet to beat years
of economic stagnation, but the big challenge will be how to
impress markets already pricing in a doubling of its inflation
target and further asset buying.
    Under pressure from new Prime Minister Shinzo Abe for bolder
action to overcome deflation and lift the economy out of
recession, the central bank will issue a joint statement with
the government pledging to pursue aggressive monetary easing to
achieve a target for inflation of 2 percent, a level achieved in
only a handful of months since the late 1990s.
    Such a pledge will keep the BOJ under political pressure to
deliver economic stimulus steps beyond its regular policy
prescription of the past few years of topping up an asset-buying
and lending programme, analysts say.
    "This will be a historical meeting for the BOJ that marks a
big change in its policy framework, so the bank will be under
pressure to deliver something new," said Masaaki Kanno, chief
Japan economist at JPMorgan Securities.
    "Doing the same thing it did in December won't be enough.
The BOJ needs to show it has changed. Otherwise, we may see a
reversal in the current yen-weakening trend," he said.
    The yen has dropped 13 percent against the dollar in
the past two months to hit a two-and-a-half-year low on
expectations Abe will force the central bank into bolder action.
Tokyo stocks have jumped by a fifth on the view the
weaker yen will boost the export earnings of the likes of Nissan
Motor Co and Canon Inc.
    That leaves room for market disappointment, analysts say, if
the central bank does no more than announce its new inflation
target and raise the ceiling of its asset-buying programme by 10
trillion yen, the most regular increment in policy easings of
the past year.
    Instead, policymakers will have to consider other measures
to impress investors and keep pressure on the yen, considered
key to Japan's economic fortunes as the country struggles with
its fourth recession since 2001.
    One option would be to make an open-ended pledge to buying
assets. The ceiling on the current programme is 101 trillion yen
and it runs until the end of the year.
    Another option would be to scrap a 0.1 percent floor paid on
short-term deposits at the central bank to encourage lending,
sources have told Reuters. 
    A joint BOJ and government statement will likely set 2
percent inflation as a medium-term target without a binding
deadline. The hope is that modestly rising prices will lift the
economy by encouraging consumers to buy before prices get any
higher.
    Sources said the BOJ governor will be asked to report
regularly to the government's top economic council on progress
towards achieving the inflation target.
    For the government's part, Abe has promised a boost to
spending to help get the economy back on its feet. Abe's
stimulus may give the economy only a temporary boost at best
unless he follows through with politically more difficult
economic reforms, such as deregulating protected sectors such as
agriculture, analysts say.
    Still, Abe is likely to keep pressure on the BOJ for more
stimulus even after Tuesday's meeting at least until an upper
house election expected in July.
    Abe is also expected to try to install a central bank
governor more sympathetic to aggressive monetary policy easing
when incumbent Masaaki Shirakawa's term ends in April. Shirakawa
has maintained that monetary policy alone can not pull the
economy out of deflation.
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