Bank of Japan expected to ease policy

Japan Monetary Policy

The Bank of Japan is expected to ease monetary policy on Tuesday for the second straight month by increasing asset purchases, as slumping exports heighten pressure for bolder action to beat deflation and support an economy on the cusp of recession.

The move will come as the central bank is set to cut its growth forecasts and push back the timing for achieving its 1 percent inflation target in a twice-yearly report, with the world's third-largest economy struggling to sustain momentum in the face of global headwinds and cooling demand at home.

The most probable option for the central bank would be an increase in its asset buying and lending programme by at least 10 trillion yen ($126 billion).

Anything less is likely to disappoint markets and trigger an unwanted rise in the yen and falls in share prices, analysts say.

To maximize the market impact, the central bank may thus take additional steps such as making a stronger commitment to continue pumping cash until 1 percent inflation is achieved, say sources familiar with its thinking.

It's almost certain the BOJ's consumer price forecast for fiscal 2014 will undershoot its 1 percent inflation goal, said Masaaki Kanno, chief economist at JPMorgan Securities in Tokyo.

An easing equal to the size of September's will disappoint markets, pushing up the yen and hurting share prices, he said.

Any expansion in the 80-trillion-yen programme would be mostly for buying of government bonds, although there may also be a small increase in exchange-traded funds (ETF) and real estate investment trust (REIT) purchases, the sources say.

The BOJ set a 1 percent inflation target and expanded asset purchases in February, and followed up with another stimulus in April. It boosted asset purchases by 10 trillion yen again in September to ease the pain from the global slowdown.

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