* Most likely option an increase in asset purchases
* BOJ wants to refrain from new initiatives for now
* Gloomy economic outlook, not just politics, behind move
By Leika Kihara
TOKYO, Dec 11 The Bank of Japan will likely ease
monetary policy next week, sources say, as looming risks such as
the potential fallout from the U.S. fiscal cliff and weak
Chinese growth continue to cloud the outlook for an economy
already seen as in recession.
The most likely option is for the central bank to expand its
asset-buying and lending programme, currently at 91 trillion yen
($1.1 trillion), by another 5-10 trillion yen, at the meeting on
Dec. 19-20, sources familiar with its thinking have said.
For now, many in the central bank want to hold off on any
new initiatives unless the U.S. Federal Reserve, which holds its
policy-setting meeting this week, surprises markets with a
bigger-than-expected stimulus and triggers a sharp yen rise.
"What's important is the outlook for next year, which
remains highly uncertain and dependent on overseas
developments," said a source familiar with the central bank's
thinking. "If the BOJ judges that its past easing measures
aren't enough, it would have to do more this month."
Another source expressed a similar view. Both spoke on
condition of anonymity due to the sensitivity of the subject.
The central bank has been under intense pressure to become
bolder in its efforts to beat deflation ahead of a lower house
election on Dec. 16, which polls suggest the main opposition
Liberal Democratic Party (LDP) will win.
The party's leader, Shinzo Abe, has called on the BOJ to
take steps such as "unlimited" easing to achieve 2 percent
inflation, double the BOJ's current target.
Central bank policymakers, feeling the heat, are leaning
toward action also because they reckon monetary easing in
September and October may not have been enough to keep overseas
risks from threatening Japan's recovery prospects.
"We took action in September and October because what we
thought were risks back in the summer have materialised. We must
debate and consider whether that was enough, taking into account
various data which came out since then," BOJ Deputy Governor
Kiyohiko Nishimura said last week, a view shared by many others
on the nine-member board.
Board member Sayuri Shirai also warned that Japan's prices
may undershoot the BOJ's projections. Two newcomers at the
board, who called unsuccessfully in October to strengthen the
BOJ's commitment to ultra-easy policy, also favour doing more to
bring forward the end of deflation.
Japan's economy shrank for a second straight quarter in
July-September and analysts expect another contraction in the
final three months of this year, as a territorial row with China
hit exports and hurt business sentiment.
A surprise rebound in factory output in October has done
little to dispel policymakers' concern that weakness in
manufacturing activity may spread throughout the economy as
companies cut wages and delay capital expenditure.
Upcoming data is unlikely to offer much respite. The BOJ's
closely-watched "tankan" survey due this week is likely to show
that business sentiment worsened in the three months to December
and companies plan to increase spending at a slower pace than
The drag on exports from the U.S. fiscal cliff or a
prolonged slowdown in Chinese demand may also threaten the BOJ's
forecast that Japan will emerge from mild recession early next
year, justifying an immediate policy response, the sources say.
The BOJ set a 1 percent inflation target in February and
eased policy four times so far this year to show its
determination to end deflation that has plagued Japan for more
than a decade.