Bank of Japan may keep monetary policy steady, counter yen criticism

TOKYO Wed Feb 13, 2013 6:30pm EST

A Japanese flag flutters atop the Bank of Japan building in Tokyo December 13, 2012. REUTERS/Yuriko Nakao

A Japanese flag flutters atop the Bank of Japan building in Tokyo December 13, 2012.

Credit: Reuters/Yuriko Nakao

TOKYO (Reuters) - The Bank of Japan is expected to keep monetary policy steady on Thursday but may revise up its assessment of the economy and rebuff growing global concern that Tokyo is trying to deliberately weaken the yen.

Still, the central bank will likely signal its readiness to expand stimulus again if risks to its outlook heighten, keeping alive market expectations of bolder action after a new BOJ leadership takes over in April.

BOJ Governor Masaaki Shirakawa, who travels to Moscow this weekend for his last Group of 20 finance leaders' meeting, is expected to reinforce Tokyo's argument that its monetary expansion policies are aimed at pulling the country out of deflation, not at nudging down the yen.

The yen had slumped nearly 20 percent against the greenback since November, picking up speed as Japan's new government put relentless pressure on the BOJ to launch more aggressive policy easing. The swift tumble has sparked fears of competitive devalations which analysts warn could lead to a currency war.

The Group of Seven rich nations on Tuesday declared that fiscal and monetary policies would not be directed at devaluing currencies, a statement meant to soothe nerves that export-reliant Japan was directly aiming to guide the yen lower.

Japan said the statement gave it a green light to continue efforts to reflate its economy but a G7 official said it was aimed squarely at Tokyo, prompting the yen to surge.

"One option now excluded is for the BOJ to buy foreign bonds. That goes against the G7 statement," said Masaaki Kanno, chief Japan economist at JPMorgan Securities.

"Otherwise, I don't see too many restraints. The BOJ can repeat what it's been saying -- that its 2 percent inflation target is aimed at beating deflation and yen declines are only a consequence of its actions."

The BOJ doubled its inflation target to 2 percent in January and made an open-ended commitment to buy assets from next year. That was its fourth monetary expansion in five months, taken largely in response to Prime Minister Shinzo Abe's relentless calls for bolder action to beat deflation.

Abe, who has power to fill three top BOJ posts opening up when Shirakawa and his two deputies leave on March 19, is keeping up pressure on the BOJ to revive the fragile economy.

But the central bank is seen holding off on expanding stimulus on Thursday and even at next month's meeting, preferring to wait at least until the first rate review under a new BOJ governor, scheduled for April 3-4.

With factory output and exports showing some signs of life, the central bank is likely to consider offering a slightly more upbeat view of the economy than in January, when it said growth was weakening.

There is a small chance the BOJ may also make technical changes to the composition of its asset-buying and lending program, as it struggles to force-feed cash to markets already awash with excess liquidity, analysts say.

Specifically, it may increase purchases of treasury discount bills to replace its fixed-rate market operations, which has frequently failed to draw enough bids in recent auctions.

Expectations that Shirakawa's successor will drive the BOJ into more unorthodox easing steps, such as scrapping a 0.1 percent floor the bank sets on money market rates, have nudged two- and five-year bond yields to record lows last week.

Japan also will report preliminary fourth-quarter gross domestic product data on Thursday (2350 GMT).

Economists polled by Reuters forecast that the economy likely grew slightly in October-December, the first expansion in three quarters, with solid private consumption and post-quake reconstruction demand helping to pull the country out of a mild recession.

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