September 20, 2017 / 9:07 PM / 2 years ago

BOJ set to keep monetary spigot open, political risk looms

TOKYO (Reuters) - The Bank of Japan is expected to reassure markets on Thursday that it will lag well behind its U.S. counterpart in scaling back its massive stimulus, as an improving economy has yet to boost inflation anywhere near its elusive 2 percent target.

FILE PHOTO - A Japanese flag flutters atop the Bank of Japan building in Tokyo, Japan June 16, 2017. REUTERS/Toru Hanai/File Photo

Premier Shinzo Abe’s expected decision to call a snap election and delay the timing for achieving his fiscal reform target could also complicate the policy outlook, putting the bank under pressure to keep borrowing costs ultra-low for longer than it wants, some analysts say.

“Delaying the fiscal consolidation target would likely result in pressure on the BOJ to continue to use its asset purchases to hold down interest rates. This could lead to greater tension between the government and the BOJ,” said Tobias Harris, vice president of Teneo Intelligence.

“However, Kuroda or a successor would have little choice but to comply, not least because the Abe government could continue to threaten the bank’s statutory independence.”

Abe has the authority to choose BOJ Governor Haruhiko Kuroda’s successor when his five-year tenure ends next April.

At a two-day rate review ending on Thursday, the BOJ’s nine-member board is widely expected to maintain its short-term interest rate target at minus 0.1 percent and the 10-year government bond yield target of around zero percent.

The BOJ is also seen maintaining a loose pledge to keep buying bonds so its holdings increase at an annual pace of 80 trillion yen ($717.6 billion), diverting from the U.S. Federal Reserve’s plan to steadily pull back from crisis-era measures.

The Fed will release its September policy decision hours earlier. It is expected to announce the start of a reduction of its stimulus-bloated balance sheet but keep interest rates on hold for a bit longer. As usual, markets and other global central banks will focus on any clues on the pace of future policy tightening.

Debate at the BOJ board will likely focus on why inflation remains puzzlingly low despite growing signs of strength in the economy, sources say.

Markets, on the other hand, will look for clues from Kuroda’s post-meeting news conference on how the changing political landscape could affect monetary policy.

Government sources have told Reuters Abe is considering calling a snap election for as early as next month and will pledge to use some of the revenue from a scheduled sales tax hike in 2019 to fund spending on education and child care.

That would force the government to delay the timing for achieving its fiscal consolidation target, a set-back for Kuroda who has consistently called on the need to get Japan’s tattered fiscal house in order.

“Low interest rates are essential when you think about Japan’s fiscal situation,” even though the effect of ultra-easy policy in stimulating the economy has become very low, said Kazuhito Ikeo, an economics professor at Keio University.

“The main effect of monetary easing is to reduce the cost of Japan’s debt-financing, which is why it’s hard for the BOJ to end easy policy.”

($1 = 111.4800 yen)

Reporting by Leika Kihara; Editing by Kim Coghill

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