TOKYO The Bank of Japan is expected to deliver its third dose of monetary stimulus in four months on Thursday in a prelude to more aggressive action next year, as it faces intensifying pressure from the country's next leader for stronger efforts to beat deflation.
Shinzo Abe, whose opposition Liberal Democratic Party (LDP) won Sunday's election by a landslide, has put the central bank's independence on the line by repeatedly calling for a binding 2 percent inflation target, double its current price goal.
The central bank may start debating its response, but an adoption of a new price target will not come until January as Abe has yet to be formally confirmed as the next prime minister.
Abe has said once he forms a cabinet on December 26 he will instruct his ministers to begin working with the BOJ on setting a shared inflation target.
That means for now, the BOJ will likely stick to its existing framework of expanding its 91-trillion-yen ($1 trillion) asset buying and lending programme, probably by 10 trillion yen, analysts say.
"With business sentiment worsening, the BOJ has no choice but to loosen policy again," said Junko Nishioka, chief Japan economist at RBS Securities, adding that anything below a 10 trillion yen increase in asset buying could push up the yen and knock Tokyo share prices.
"I don't expect anything concrete to come out on the inflation target debate. Any big change in the BOJ's policy framework may have to wait until the central bank has a new governor in April," she said.
Markets have already priced in BOJ action on Thursday, with 14 out of 19 economists polled by Reuters last week expecting further easing via an increase in asset purchases.
The yen has fallen almost 9 percent against the dollar since September, as Abe's emergence as the likely next prime minister raised market expectations of more expansionary policy and spending.
Satoru Ishiba, the LDP's No. 2 official, welcomed the yen's fall as helping exporters by boosting their competitive edge, but warned against excessive moves in that direction.
"The yen has surely been too strong and the current trend towards a weaker yen is a good thing. But I don't think it would be good for the yen to weaken extremely," said Ishiba, the LDP's secretary-general.
"Everything has both the right side and the wrong side, and it's not good to emphasize only one side. It is important to maintain appropriate currency levels."
The BOJ set a 1 percent inflation target in February and has boosted asset purchases four times so far this year, including in September and October, to ease the pain from weakening global demand on the export-reliant economy.
It last eased policy for two straight months in 2003, when it nudged rates to zero and pumped cash aggressively to battle deflation under its previous quantitative easing policy.
Some in the BOJ, particularly officials close to the conservative Governor Masaaki Shirakawa, want to delay any action until January, when there is more clarity on the new government's policies and when the central bank conducts a quarterly review of its long-term growth projections.
But that may be too costly with business sentiment already slumping and companies delaying capital spending plans on weak global demand, adding to evidence that any rebound from recession early next year will be minor, analysts say.
Abe made a rare, direct push for a higher inflation target when Shirakawa visited the LDP's headquarters on Tuesday, saying that the central bank must pay heed to the fact that he won an election campaigning for bolder monetary stimulus.
The LDP and its coalition partner, the New Komeito, together won a two-thirds majority in the powerful lower house that would allow them to overrule parliament's upper house in most matters, including on any bill to revise the law guaranteeing the central bank's independence from government interference.
Abe, who plans to compile a big stimulus package to revive the economy, may use that threat to nudge the central bank into buying bonds more aggressively to finance the costs.
Central bankers are lining up future options such as expanding the type of risky assets it buys, investing in an LDP-proposed fund to buy foreign bonds to weaken the yen or buying government bonds more aggressively to fund Abe's fiscal stimulus plans.
Shirakawa has consistently argued that setting a 2 percent inflation target would be counter-productive in a country that has not seen consumer inflation exceed 1 percent for most of the past two decades.
($1 = 83.9850 Japanese yen)
(Additional reporting by Tetsushi Kajimoto; Editing by Alex Richardson and John Mair)