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Markets keeping close watch on this week's Bank of Japan meeting

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Whatever the timing of the new fiscal package and the BOJ's accompanying increase in purchases of Japanese government securities, this will not amount to having the central bank directly underwrite new government debt, which Mr Kuroda noted last week is against Japanese law.

Tokyo

THE Bank of Japan's (BOJ) Policy Board is due to meet this week amid strong expectations that it will announce new monetary easing initiatives following a sharp cut in the government's economic growth and inflation forecasts - and speculation that the BOJ will also downgrade its own forecasts.

Tokyo stock prices have been riding a six-week high (and the yen hovering near a six-week low) on the basis of such new BOJ initiatives. But the Japanese central bank could disappoint markets and delay further easing to coincide with government fiscal stimulus to be announced next month, some say.

If market expectations are disappointed in the way that some experts predict, the impact on share prices and on the yen would not be felt until the end of the second day (Friday) of the two-day BOJ meeting, with part of that impact being felt only when markets re-open next Monday.

Despite the fact that many economists are convinced that monetary policy - in the form of quantitative and qualitative easing - has about reached the limits of its effectiveness in Japan and Europe, speculation remains very strong about the imminence of further moves by the BOJ.

A large majority of economists polled recently by media in Japan forecast further easing as early as this week. "It is becoming increasingly difficult for the BOJ to hold off easing," Yukio Ishizuki, senior foreign exchange strategist at Daiwa Securities in Tokyo, was quoted by Reuters as saying.

BOJ governor Haruhiko Kuroda himself appeared to feed such speculation during the G-20 finance ministers and central bank governors meeting in Chengdu, China, last week when he pledged to ease policy further if needed to achieve the BOJ's 2 per cent inflation goal, and to continue stimulus until the price target is met.

Japan's Cabinet Office has cut its growth and inflation forecasts dramatically. Gross domestic product (GDP) is now forecast to grow by only 0.9 per cent in the current fiscal year compared to a January estimate of 1.7 per cent while the official inflation forecast has been slashed from 1.2 per cent to just 0. 4 per cent.

Rather than relying on yet more monetary easing to avoid a slide back into deflation and to get growth moving forward more convincingly, Japanese prime minister Shinzo Abe is planning to announce a fiscal stimulus package of some 20 trillion yen (S$256 billion) or more next month, according to veteran Japan analyst Jesper Koll.

Mr Koll, who has served on government advisory panels and who is currently chief executive officer of investment company Wisdom Tree, Japan, believes that further monetary easing will be linked directly to this fiscal package, suggesting that new monetary and fiscal stimulus will be announced in tandem next month.

The fiscal package, which could be equal to some 2 per cent of GDP, or even more, will take the form largely of financing for infrastructure projects that are seen to have maximum spin-off impact on growth and employment in Japan and will be financed partly from so-called special "zaito" bonds.

These are not the exotic "perpetual" or non-redeemable bonds that have been the subject of much market speculation recently, but are in effect project bonds to be redeemed out of project revenues rather than from tax revenues. As such, they will not add technically to Japan's huge burden of government debt.

There has also been a great deal of confusion, according to experts such as Mr Koll, over the prospect of so-called "helicopter" money infusions into the Japanese economy. Contrary to speculation, the central bank cannot issue helicopter money directly but only finance issues of such funds by the government.

BOJ purchases of zaito bonds do not amount to helicopter money drops, as the term applies to the issue of cash vouchers or forms of quasi cash to targeted sectors of society as a means of stimulating personal consumption. Mr Kuroda recently dismissed the possibility of helicopter drops by the BOJ itself.

Such infusions should more accurately be termed "drone money" says Mr Koll, as they are specifically aimed at socially-targeted groups of potential consumers rather than being distributed at random.

Mr Abe has been pushing strongly for increased fiscal stimulus as it became obvious that dramatic monetary easing by the Japanese central bank could not in itself enable Japan to reach the economic growth and inflation targets envisaged under his original Abenomics plan.

Whatever the timing of the new fiscal package and the BOJ's accompanying increase in purchases of Japanese government securities, this will not amount to having the central bank directly underwrite new government debt, which Mr Kuroda noted last week is against Japanese law.

The BOJ will continue to buy new debt from underwriting syndicates of banks and other institutions. But the central bank's financing of government debt - an area where it now represents the most important single buyer - will be more targeted, possibly softening the impact on the BOJ's balance sheet.