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Less than three months ago, the BOJ justified
its shock expansion of "quantitative and qualitative easing" (QQE)
as aimed at preventing oil price falls, and a subsequent
slowdown in price rises, from weighing on inflation
expectations.
The move kept alive market speculation that the relentless drop
in oil prices, which have nearly halved since October, will
force the BOJ to ease again in coming months.
At the two-day rate review ending on Wednesday, the BOJ is set
to cut its core consumer inflation for next fiscal year below
1.5 percent from 1.7 percent projected in October, sources
familiar with the bank's thinking said.
With the BOJ's massive purchases already pushing yields into
negative territory, many board members want to hold off on
expanding QQE for now.
The BOJ may therefore instead expand two loan schemes aimed at
encouraging banks to boost lending and extend their deadlines
beyond March, sources say.
But a surprise increase of asset purchases under QQE cannot be
ruled out if the BOJ board's median inflation forecast for next
fiscal year falls below 1 percent, some analysts say.
"By tying its October action to oil moves, the BOJ fell into its
own trap," said Izuru Kato, chief economist at Totan Research.
"Cheap oil benefits a huge importer like Japan. It's only a
problem for the BOJ."
In the quarterly review of its long-term projections, the BOJ is
also set to revise up its economic growth forecast for next
fiscal year, sources have said.
That may help the BOJ justify standing pat on policy. It hopes
to argue that improvements in the economy will narrow the output
gap and lead to wage hikes, offsetting the temporary downward
pressure from oil price falls.
The BOJ issues a semi-annual report with forecasts on the
economy and prices in April and October of each year. It reviews
the projections at rate reviews in January and July. Many
private analysts expect consumer inflation to hover below 1
percent next fiscal year and the following year.
Under QQE, the BOJ has pledged to double base money via
aggressive asset purchases to achieve 2 percent inflation during
the next fiscal year beginning in April.
(Editing by Eric Meijer)
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