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This week's critical BOJ meeting may see further market-impacting actions
COMMENTS by Bank of Japan (BOJ) governor Haruhiko Kuroda during the World Economic Forum in Davos, Switzerland at the weekend that inflation expectations in Japan are weakening have added to intense speculation that the BOJ Policy Board will announce further monetary-easing moves when it meets on Jan 29.
But there are sharp divisions over whether or not any such moves are likely to prove effective - and whether they could even damage the health of the world's third-largest economy.
Inflation expectations in Japan have become "somewhat weak", Mr Kuroda noted in remarks that were seen by some as preparing markets for a further decisive round of monetary easing by the Japanese central bank this week.
The question now is not so much whether the BOJ will announce fresh actions on Friday as what form these actions will take, analysts say. Beyond the obvious options of buying more government or private-sector securities, the central bank could opt for some more radical measures, some say.
Coming in the wake of hints last week by European Central Bank (ECB) president Mario Draghi that the ECB too could soon embark upon further monetary easing, Mr Kuroda's comments also suggested the possibility of coordinated central bank actions.
The BOJ chief continued to claim his primary concern is achieving the central bank's 2 per cent annual inflation target - from which it is still far short. But some believe the recent economy-damaging surge in the value of the yen may be an equal concern of the BOJ.
Financial markets stabilised somewhat last Friday after vertiginous plunges in equity and currency values which nevertheless have seen the yen soar as investors sought the Japanese currency as a safe haven.
If the BOJ does opt for a third round of quantitative easing, this could mark "a start down the road of no return", former BOJ chief foreign-exchange dealer Tohru Sasaki, who now heads forex operations at JP Morgan Bank in Tokyo, told The Business Times. Japan could become addicted to monetary easing, he implied.
"I think the impact on the yen from additional easing would be limited and short-lived," said Mr Sasaki. "The reason behind sharp depreciation of the yen (until recently) was deterioration of Japan's trade balance. But, it is now back to balance and the current account surplus is increasing significantly."
These factors point to upward pressures on the yen and JP Morgan is maintaining its forecast that the Japanese currency will appreciate from the current level of around 117 to the dollar to nearer 110 by the end of this year, he added.
Some suggest, however, that Mr Kuroda may no longer be focusing only on inflation and inflation expectations in Japan - and the impact that the yen exchange rate has on these - but that the central bank could focus more overtly in future on growth targets for the Japanese economy.
"A nominal GDP target is a long shot for January, but may still follow before long," Japan analyst and chief executive officer of WisdomTree Investments in Japan Jesper Koll told BT. Such a move would go beyond a central bank's normal remit but some argue the BOJ and the government policy in Japan have become "fused" under Mr Kuroda.
"The BOJ governor has always said that he will not hesitate in taking action, including additional monetary easing, to achieve the 2 per cent inflation target," Japan's Chief Cabinet Secretary Yoshihide Suga said last week in what was seen as a possible government endorsement of such action.
"Adding a new policy tool - negative interest rates - should be sufficient to re-establish Governor Kuroda's pro-growth leadership credentials at this stage," suggested Mr Koll, although the BOJ governor indicated in comments last week he did not see negative rates as being relevant to Japan's needs at present.
His remarks in Davos were, meanwhile, some of the most explicit that he has made recently suggesting the need for further monetary easing.
"I don't think there is any technical limitation to further strengthening our quantitative and qualitative easing if necessary to achieve our 2 per cent target," he said.
"Japan's underlying price trend is not deteriorating but some indicators on inflation expectations have been somewhat weak," Mr Kuroda was reported as saying during the Davos meeting. "We will not hesitate adjusting policy, including easing, if necessary to achieve our price target."
Not everyone believes the BOJ will, or should, move at this point, however, despite the high level of expectations that have been created in recent weeks by the deteriorating global economic situation and by Mr Kuroda's repeated insistence that the BOJ will do "all it can" or "all it takes" to meet its targets
"I do not think that it is appropriate at this stage for BOJ to take any additional action, because what is happening in international (markets) is predominantly speculative and temporary in nature," former senior BOJ official and deputy president of the Japan Centre for International Finance Rei Masunaga told BT.
"This speculative situation may continue for some time (and only at that point should the BOJ) take some action, knowing that such action will have a rather limited impact on the market, but just to change the mood of the market," added Mr Masunaga.
Mr Masunaga does not believe the BOJ will opt to purchase even more Japanese Government Bonds than it does already, although market expectations are it will soon raise such purchases from 80 trillion yen (S$963 billion) to 100 trillion yen annually as a means to inject further funds into the Japanese economy.
Meanwhile, Mr Masunaga added "I do not think that the appreciation of the yen will have any big impact either way on the Japanese economy, unless the yen strengthens beyond 110" to the dollar.