The Bank of Japan board kept its policy unchanged on Thursday and voted down a proposal to step up monetary stimulus, saving ammunition for new leaders who are expected to take bolder action to try to end nearly two decades of deflation.
Investors say action is likely to come at the BOJ's next meeting on April 3-4, when Asian Development Bank President Haruhiko Kuroda, a vocal advocate of aggressive easing, is expected to have taken over as governor.
At this week's meeting, BOJ board member Sayuri Shirai proposed bringing forward open-ended government debt purchases planned for next year. While she was voted down 8-1, her proposal was seen as a harbinger of the changes coming to monetary policy.
"Today's decision came as no surprise, but the fact that Shirai proposed bringing forward open-ended JGB purchases has laid the groundwork for further monetary easing at the bank's next policy review under the new leadership," said Junko Nishioka, chief Japan economist at RBS Securities.
"Even though the proposal was rejected today, it could be put forward again at the next policy meeting in April and adopted given that BOJ governor nominee Kuroda has floated a similar idea in parliament."
The BOJ revised up its assessment of the economy, saying it was bottoming out, which was slightly more positive than last month's view that the economy appeared "to have hit bottom."
The policy meeting was the last for Governor Masaaki Shirakawa and his two deputies. They leave on March 19 after a five-year term spent battling crises including the aftermath of Lehman Brothers' collapse in 2008 and the devastating March 2011 earthquake in Japan.
Shirakawa challenged Kuroda's argument that the central bank needed to focus more on fostering inflation expectations to end deflation, saying the best way to achieve inflation was for rising wages to accompany increased growth expectations.
"In the case where we rely mostly on inflation expectation, this would prompt a rise in government bond yields, reducing the price of JGBs held by financial institutions and thereby hurting the financial system," Shirakawa told a media conference.
"If wage hikes come first, this would squeeze corporate profits and therefore unlikely lead to sustained recovery in real economy."
At the meeting, board member Ryuzo Miyao proposed continuing the BOJ's policy of keeping interest rates virtually at zero until the central bank's target of 2 per cent inflation is in sight. His proposal was also voted down 8-1.
"We may see more meeting results of split votes under the new BOJ governor," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.
"Current board members have not necessarily been aggressive towards easing, and it is hard to consider all of them will suddenly change their stance. But given the new BOJ leadership will have a more reflationary stance, the pace of monetary easing will likely speed up."
The revision to the economic assessment is unlikely to relieve pressure on the BOJ's new management to come up with more innovative ways to end deflation.
Facing relentless pressure from new Prime Minister Shinzo Abe for bolder efforts to revive the economy, the BOJ doubled its inflation target to 2 per cent in January and made an open-ended pledge to buy assets from next year.
Under Shirakawa, the BOJ agreed to buy assets or make loans totalling ¥101-trillion ($1.07-trillion U.S.) by the end of this year, part of which includes buying government bonds with a maturity of up to three years.
Abe nominated Kuroda to shake up the BOJ, and parliament is expect to confirm his appointment later this month. In a confirmation hearing this week, Kuroda advocated buying longer-dated Japanese government bonds to help end deflation.
Kuroda said buying longer-dated bonds would better foster inflation expectations and encourage an escape from deflation.
Abe's push for bolder monetary stimulus has helped weaken the yen to a near three-year low against the dollar, giving the export-reliant economy some relief and the BOJ some breathing space.