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‘Bold’ monetary policy moves ahead for Japan this week

The Bank of Japan is working to combat nearly two decades of persistent deflation.

KIM KYUNG-HOON/REUTERS

It will not be a run-of-the-mill central bank meeting.

When the Bank of Japan begins a two-day rate review session on Monday, it will be with an insistent directive from Japan's new Prime Minister Shinzo Abe that "bold" monetary easing policy be adopted to spur the country's moribund economy and end nearly two decades of persistent deflation.

Rarely has so much importance been placed on a central bank gathering. When the Bank of Japan releases its statement when the meeting ends on Tuesday, it will be deeply scrutinized by currency, debt and equity markets, which are expecting nothing less than a major shift in policy.

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Investors have already priced in expectations of further monetary easing. Japan's currency, the yen, has lost 11 per cent against the U.S. dollar and 15 per cent against the Euro since the election that returned Mr. Abe to the job of Prime Minister was called in November. Shares of Japanese construction and export firms have rallied in anticipation of further loosening.

Economists at Capital Economics in London warn that the yen could "snap back" if the BOJ's policy shift fails to impress.

It is widely expected that the BOJ will raise its annual inflation target from 1 per cent to 2 per cent and boost the government's 101-trillion yen asset purchase stimulus program (APP) by an additional 10-trillion yen ($113-billion U.S.).

That may not be enough to sustain the trend of a weakening yen and bolster conditions for sustained economic growth.

"Given that the bank is failing to meet its current 1 per cent inflation goal and that it had already committed to expand the APP further, such shifts will make little practical difference," Capital Economics's Mark Williams said in a note to clients last week.

"There is therefore a risk that today's investor optimism will turn to disillusion if the change of tack loudly heralded by Mr. Abe is ultimately seen to have altered little on the ground."

There are indications, however, that the central bank may go even further in its attempts to right the world's third-largest economy.

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Reuters reports that the BOJ is considering making an open-ended commitment to the asset-buying scheme that would see it remain in place until the 2 per cent inflation target is achieved. The quantitative easing plan is currently scheduled to run until the end of the year.

Citing sources familiar with the BOJ's thinking, Reuters also reported the bank will consider scrapping the 0.1 per cent interest rate currently paid on financial institutions' reserves held with the central bank. Such a move would effectively see money market rates fall to zero.

BOJ board member Koji Ishida proposed such a measure in December but was voted down by other board members by 8-1. However, another BOJ member, Sayuri Shirai, said in a recent speech that the idea was worth considering as a way to lower interest rates further and continue the weakening of the yen, Reuters said.

Mr. Abe has made it clear that he intends to nominate a successor to BOJ Governor Masaaki Shirakawa (whose 5-year term ends in April), who will insure Japan achieves his stated goal of 2 per cent inflation.

Mr. Abe's demands have called the central bank's autonomy from the new administration into question. Economics minister Akira Amari will attend the central bank meeting on Monday, according to The Japan Times.

Speaking to reporters in Washington last week, International Monetary Fund director Christine Lagarde urged the BOJ to maintain its independence.

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"Monetary policy with a different inflation target is in and of itself certainly a good and interesting project if associated with clear independence of the central bank," Ms. Lagarde said.

With files from Reuters

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