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The Globe and Mail

Bank of Japan stands pat, seen keeping finger on trigger

Cherry blossoms are in full bloom in front of the Bank of Japan headquarters in Tokyo April 10, 2012.


The Bank of Japan kept monetary policy steady as expected on Tuesday, holding off on any further steps to help meet its new inflation target and boost activity ahead of a more thorough assessment of the economy later this month.

The yen edged higher and Tokyo stock prices slid after the board's unanimous decision to stand pat, although many market players had expected the bank to wait in easing until the next rate review on April 27, when revised long-term forecasts should show that a sustained end to deflation is a long way off.

BOJ Governor Masaaki Shirakawa tried to diffuse market hopes of more stimulus for the fragile economy, saying it was hard to set a clear-cut timetable for when Japan can achieve the bank's 1 per cent inflation target.

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But markets are already factoring in monetary easing at the BOJ's next meeting after the finance minister piled fresh pressure on the central bank, saying he expects it to take appropriate steps to support the economy this month.

"The question now is not whether the BOJ could ease on April 27, but what the bank would do in taking further easing steps," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

"Inaction would upset politicians and disappoint markets, possibly sending the dollar below ¥80."

The BOJ maintained its assessment that the economy is showing some signs of picking up and Mr. Shirakawa offered an upbeat view on the outlook, saying that he saw a greater chance of Japan achieving a moderate recovery soon.

He offered few clues on when the BOJ will next ease, but signalled that the timing would not be determined solely by yen or stock moves, warning markets against expecting imminent action too much.

"It's inappropriate to directly link monetary policy with market moves. The key must always be on economic and price moves."

The BOJ, as widely expected, kept its policy rate at a range of zero to 0.1 per cent, and board member Ryuzo Miyao did not repeat his solo proposal last month to boost asset purchases.

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The BOJ surprised markets in February by increasing its asset buying and loan scheme by ¥10-trillion ($121-billion U.S.) and setting a 1 per cent inflation target.

It held fire last month, as the yen's retreat from record highs and growing signs Japan is headed for a recovery give it some breathing space.

But renewed expectations of further stimulus by the Federal Reserve, driven by Friday's disappointing U.S. jobs data, have nudged the yen to a one-month high against the dollar, keeping pressure on the BOJ to act again soon.

Many on the BOJ board are ready to pull the trigger on any signs that the recovery is under threat. While they stick to the view the economy is picking up, they remain worried about risks such as slowing Chinese growth and high oil prices.

Political pressure has not subsided despite February's action.

Finance Minister Jun Azumi voiced hope for an easing this month, saying that April was key in gauging the outlook for Japan's economy because money set aside under the state budget for reconstruction from last year's earthquake will begin to flow through the economy.

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"In April we have to build a solid base from which the economy can expand this year. We also have G20 meetings, and I think the BOJ will look at this closely and respond appropriately as needed," he told a news conference on Tuesday.

Mr. Shirakawa may face demands for more action when he attends, as an observer, a new government panel to discuss measures to overcome deflation, which will hold its first meeting by the end of this month.

The BOJ, knowing political pressure will persist, wants to time its action wisely. It now expects core consumer inflation of 0.1 per cent for the fiscal year that began in April and 0.5 per cent for the following year, well below the 1 per cent target.

With few signs of domestic price pressures, the BOJ may find it hard to justify raising its inflation forecast on April 27 unless it is accompanied by another round of stimulus.

Mr. Shirakawa said he had no preset idea on whether the BOJ would ease at its next meeting, but added that the bank would examine economic and prices "particularly closely" at the meeting and take appropriate steps as needed.

When the BOJ next acts, it will probably again expand its ¥65-trillion asset buying and loan program, mostly by committing to purchase more government bonds. In doing so, it may need to extend the maturity of bonds it buys under the program to five years from the current two-year timeframe as two-year yields are already stuck at 0.1 per cent.

Mr. Azumi and Mr. Shirakawa are scheduled to attend the G20 finance leaders' meeting to be held in Washington next week.

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