TOKYO (AFX-ASIA) - The Bank of Japan may increase planned outright purchases of Japanese government bonds in its latest monetary guidelines, to be issued tomorrow after its two-day policy board meeting, analysts said.
They said the sharp slump in bond and equity markets in recent weeks may force the bank to expand its already easy monetary policy, though the move is expected to be superficial, given the financial system is awash with liquidity.
The bank may also offer verbal support for the government, whose reforms look shaky after Prime Minister Junichiro Koizumi's approval rating plummeted following his dismissal of the popular Makiko Tanaka as foreign minister.
Deutsche Bank senior currency strategist Kenneth Landon said the market has been speculating on a possible easing by the central bank as early as tomorrow due to the sharp falls in almost all local financial markets.
The Nihon Keizai newspaper reported this morning that the BoJ is expected to discuss whether further monetary easing measures are necessary in response to falling stock prices and higher long-term interest rates.
The discussion will include plans to increase the amount of long-term government bonds the central bank buys, so-called 'rinban' operations, to around 1 trln yen a month from 800 bln yen at present, it said.
"There is some speculation of increased 'rinban' purchases by the bank," Landon said, adding that further pressure on the bank may come from the meeting of G7 finance ministers in Ottawa, starting tomorrow. "They will discuss BoJ monetary policy," he said, noting that the G7 countries have already been urging for more action by the BoJ. Nevertheless, the impact of any limited move the bank is expected to be minimal for the financial system due to the already super-easy policy.
Landon noted that market bond yields have risen recently, suggesting that the market does not believe the easing will boost the economy.
"They are already... pumping a lot of money into the banking system," he said.
Mizuho Securities chief market economist Yasunari Ueno said he sees the possibility of a hike of some 200 bln yen in outright purchases of JGBs to 1 trln yen a month, after the sustained declines in share prices.
"But as long as a change in directive comes in line with the scope of the existing policy framework, such a change, even if it is decided, will not have any lasting impact," Shimamura said. Standard and Poor's MMS managing analyst Hideki Naito said the BoJ may feel pressured to take some nominal action to provide additional liquidity at its policy meeting on Friday after the recent sharp fall in financial markets.
"The BoJ may consider the current stockmarket and JGB market and may be forced to do something but maybe it will be quite technical," he said.
The central bank may also offer words of support for the increasingly beleaguered Koizumi administration. "The Bank of Japan... is expected to take some kind of action to prevent a worst case scenario (in the financial system)," JP Morgan chief economist Masaaki Kanno said.
"If the situation is seen as really bad then it might call for joint action with the government," he said. Credit Suisse First Boston Yasushi Okada noted that the BoJ has insisted the government must initiate any intervention in the banking sector.
"But I imagine (the BoJ) could make an announcement that it won't hesitate to cooperate with the government. People are imagining the collapse of the financial markets."