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Worsening business mood could push BOJ to ease more: sources

Tuesday, February 23, 2016 - 16:56

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Just three weeks after the Bank of Japan shocked markets with its adoption of negative rates, central bank policymakers are questioning the baseline economic assumptions underlying that decision, people familiar with the matter say.

[TOKYO] Just three weeks after the Bank of Japan shocked markets with its adoption of negative rates, central bank policymakers are questioning the baseline economic assumptions underlying that decision, people familiar with the matter say.

In judging whether additional monetary easing is necessary in coming months, policymakers are particularly watching to see if market volatility has hurt business confidence.

While the BOJ is sticking with its view that economic recovery will continue, people familiar with the central bank's thinking said it stands ready to ease again if market tumult discourages firms from increasing capital spending and wages.

"The potential damage to sentiment from the market rout is the biggest risk," said one of the sources. "If such risks threaten the broad price trend, that would be a trigger for more easing." At its January policy meeting, the BOJ maintained its upbeat scenario that the world's third-largest economy would recover moderately and underpin an improvement in the broad price trend.

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However, since then, market volatility has not abated and companies are using global headwinds as an excuse to forgo wage hikes, dashing the BOJ's hopes its January move would be enough to lift sentiment.

The BOJ next meets for a policy meeting on March 14-15. It will review its long-term economic and price forecasts at another rate review on April 27-28. Among the data it could scrutinise by then is its closely-watched "tankan" quarterly business sentiment survey due on April 1.

Japan's economy shrank more than expected in the final quarter of last year as consumer spending and exports slumped, and analysts expect only a modest rebound in January-March.

Manufacturers' confidence remained subdued in February and the mood was seen worsening in coming three months, a Reuters poll showed, as exports in January fell the most since 2009.

Having just eased policy by a narrow 5-4 vote, many BOJ policymakers prefer to spend at least several months to scrutinise the effect of the January easing on the economy.

But the continued slide in oil prices and the reluctance of labour unions to demand higher pay may force the BOJ to further cut its inflation forecasts in April and push back the timing for achieving its 2 per cent target, analysts say.

Such views have kept alive market speculation the BOJ will ease again either in March or April.

BOJ Governor Haruhiko Kuroda said on Monday the economy continues to recover moderately, but warned he was closely watching how "globally unstable" markets affect the outlook.

REUTERS

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