BOJ set to keep monetary spigot open, political risk looms

[TOKYO] The Bank of Japan is expected to reassure markets on Thursday that it will lag well behind its US counterpart in scaling back its massive stimulus, as an improving economy has yet to boost inflation anywhere near its elusive two per cent target.

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 central 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."

Mr 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 per cent 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 (S$966.45 billion), diverting from the US Federal Reserve's plan to steadily pull back from crisis-era measures.

At a closely watched two-day policy meeting on Wednesday, the Fed left interest rates unchanged as expected but signalled it still expects one more increase by the end of the year despite a recent bout of low inflation.

The US dollar rose to a two-month high against the yen and extended its gains against the euro after the Fed's hawkish tone heightened expectations for a rate hike in December.

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 Mr Kuroda's post-meeting news conference on how the changing political landscape could affect monetary policy.

Government sources have told Reuters Mr 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 Mr 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."

REUTERS