Exclusive: BOJ may ease again, double inflation target - sources

TOKYO (Reuters) - The Bank of Japan will consider easing monetary policy again this month as it eyes doubling its inflation target to 2 percent, sources say, as weakness in the economy threatens to delay the country in getting out of deflation.

Any easing will likely take the form of another increase in the BOJ's 101 trillion yen ($1.2 trillion) asset buying and lending program, mostly for purchases of government bonds and treasury discount bills, sources familiar with its thinking say.

Under intense pressure from new Prime Minister Shinzo Abe, the BOJ will likely adopt a 2 percent inflation target at its January 21-22 rate review, double its current goal, and issue a statement with the government pledging to pursue bold monetary easing steps, the sources say.

By accompanying the new target with more stimulus, the BOJ hopes to show its determination to get the country out of deflation, and fend off more radical demands from politicians such as a revision to the BOJ Law guaranteeing its independence in guiding monetary policy.

Markets have not been expecting the BOJ to follow up December's stimulus so quickly, and instead had been speculating on new policy steps it might take. The 2 percent inflation target has been largely priced in after the BOJ pledged last month to review its current price goal.

"The trend for prices is weak and that's a concern. The outlook for overseas economies is also highly uncertain," said one of the sources who spoke on condition of anonymity due to the sensitivity of the matter.

If the BOJ does ease in January, it would be the first time it has expanded stimulus at successive meetings since 2003, when it was battling a banking crisis amid its five-year experiment with quantitative easing that lasted until 2006.

After the December easing, Governor Masaaki Shirakawa stressed how much money the BOJ was already pumping into the economy via asset purchases, seen as a sign of his reluctance to boost stimulus further.

However, an increase in asset purchases would still be disappointing to those expecting the BOJ may try bolder new measures in response to Abe's calls for radical steps.

Some BOJ board members have floated other options, such as committing to buy assets open-endedly or cutting the 0.1 percent interest the BOJ pays on excess reserves that banks park with the central bank.

But those ideas have not made much headway and may be put on hold until the conservative Shirakawa's term at the central banks ends in April. A lack of new steps could disappoint markets and trigger a rebound in the yen, analysts say.

NO CONSENSUS YET

The central bank has yet to reach a consensus on whether further action is necessary. Some officials feel the bank has offered enough stimulus for now, having set a 1 percent inflation target last February and eased policy via an increase in asset purchases five times in 2012.

But a growing number of pessimists fret about persistent price declines and risks for the export-reliant economy, such as the continued slowdown in global growth and slumping sales to China following last year's territorial dispute.

In a quarterly review of its long-term forecasts, also scheduled at this month's meeting, the BOJ is likely to cut its economic forecast for the fiscal year ending in March from a 1.5 percent expansion projected in October, the sources said.

While it may slightly revise up its forecast for the following year, the feeble growth projections would suggest a convincing exit from deflation remains distant - giving the central bank justification to loosen policy again.

Government officials are also turning up the heat, demanding further stimulus aside from a higher inflation target to end nearly two decades of grinding deflation.

Core consumer prices, Japan's key gauge of inflation, were down 0.1 percent in November from a year earlier.

Pressure on the BOJ intensified after Abe's party won December's lower house election by a landslide, calling on the central bank to set a 2 percent inflation target and ease policy "unlimitedly" to achieve it.

The central bank then pledged to review its price target in January. It will likely meet Abe's calls for a 2 percent inflation target, although it remains opposed to setting a specific deadline for achieving that goal.

($1 = 87.1300 Japanese yen)

(Additional reporting by Sumio Ito and Yoshifumi Takemoto; Editing by Hugh Lawson and John Mair)

Source: http://news.yahoo.com/exclusive-boj-may-ease-again-double-inflation-target-023756395--business.html

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