January 28, 2016 / 11:31 PM / 2 years ago

Bank of Japan to meet as market swings complicate policy call

People holding umbrellas walk in front of the Bank of Japan building after snowfall in Tokyo, Japan January 18, 2016. REUTERS/Toru Hanai

TOKYO (Reuters) - The Bank of Japan is expected to push back on Friday the timing for hitting its inflation target, and debate whether the risks from volatile markets and slowing global growth have heightened enough to warrant easing monetary policy further.

Many central bankers prefer to stand pat as they feel that underlying trend inflation continues to improve, with companies gradually raising prices reflecting a moderate recovery.

They are wary of using their diminishing policy options to counter what they see as factors beyond their control, such as volatile financial markets and China’s economic slowdown.

But the debate may swing in favor of easing if Governor Haruhiko Kuroda proposes acting now to prevent wild market swings from hurting already-waning inflation expectations, say sources familiar with the BOJ’s thinking.

“It will probably be a very close call,” said Izuru Kato, chief economist at Totan Research and a well-known BOJ watcher.

“Even if the BOJ maintains its upbeat economic view, it may ease anyway and argue that such pre-emptive action was necessary to keep inflation expectations from weakening,” he said.

The BOJ meets in the wake of Thursday’s abrupt resignation of Economy Minister Akira Amari, who has spear-headed premier Shinzo Abe’s policy drive to pull the country out of deflation, casting further doubt on the success of the administration’s “Abenomics” stimulus policies.

Markets are divided on whether the BOJ will maintain its pledge to expand base money at an annual pace of 80 trillion yen ($675 billion), or accelerate the pace of money printing to underscore its resolve to do whatever it takes to hit its ambitious 2 percent inflation target.

The U.S. Federal Reserve warned on Wednesday that it was “closely monitoring” global economic and financial developments, and wasn’t ready to abandon a plan to tighten monetary policy this year, offering some relief to BOJ officials wary of the pain further yen gains could inflict on exports.

But the BOJ is hardly complacent. Inflation has ground to a halt and many firms remain wary of raising wages.

Slumping Tokyo stocks may discourage firms from boosting capital expenditure, threatening the positive momentum the BOJ is trying to create with its heavy money printing.

Kuroda has remained upbeat on prospects for achieving his price target but acknowledged over the weekend that inflation expectations were “somewhat weak.”

Even if the BOJ stands pat, he may try to keep alive expectations of future action by signaling that more stimulus is forthcoming, analysts say.

A decision to ease will likely result in a split vote. At least four of the nine board members are wary of topping up an already massive asset-buying program that has had little success in boosting inflation expectations.

Reporting by Leika Kihara; Editing by Eric Meijer

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