TOKYO (Reuters) – The Bank of Japan is expected to maintain monetary policy on Wednesday and maintain its optimistic view of the economy, even if escalating global trade restrictions slow down growth.
FILE PHOTO: A Japanese flag flutters on the building of the Bank of Japan in Tokyo, Japan, March 15, 2016. REUTERS / Toru Hanai / File Photo
The nine-member management of the central bank will probably also follow the movements of the bond market critically since the decision in July to allow the returns to move more flexibly around the zero percent target.
In a two-day interest rate assessment that ends on Wednesday, the BOJ will keep its short-term interest rate target at minus 0.1 percent and that for long-term interest rates at around zero percent.
It is also being held to a promise, introduced in July, to keep the rates very low for a longer period if inflation remains far from its 2 percent target.
"The monetary policy meeting of the BOJ in September should only be an extension of the first July and we expect a wait-and-see attitude without important announcements," said Katsunori Kitakura, senior strategist at Sumitomo Mitsui Trust Group.
"With the introduction of forward guidance, the BOJ has successfully removed all speculations regarding a quick exit from its easing program."
The meeting anticipates a reigning government race on Thursday, in which prime minister Shinzo Abe seems to be winning and put him on the right track to become the longest-serving prime minister of Japan.
Although few analysts expect the BOJ to provide immediate incentives, politicians have sent out signals that they are becoming more susceptible to the idea of a future exit of simple policies.
Abe said last week that the BOJ's ultra-light policy should not last forever, which indicates its hope to pave the way towards an exit from a radical stimulus program.
Markets focus on how Governor Haruhiko Kuroda could respond to Abe's comments, as well as indications as to whether the BOJ may act again to stimulate trading activities.
At his post-meeting briefing, Kuroda may also warn that protectionism does not benefit any country, in the wake of the decision of US President Donald Trump to strike new tariffs on China.
Japanese policymakers are concerned that trade bills can damage business morale and prevent companies from spending on it.
Nevertheless, the BOJ continues to hold to its estimate that the world's third-largest economy will continue a moderate expansion driven by robust global demand.
It may offer a slightly more positive view of capital expenditures than in July, reflecting a whole series of recent data showing that companies are buying more equipment to deal with labor shortages.
Despite the BOJ's steps in July to make its policy framework more flexible and sustainable, long-term returns are caught in a narrow range of around 0.1 percent, underlining the difficulty of pursuing two goals – sticking to a targeted policy on limiting bond yields an attempt to stimulate trading activities.
Reporting by Leika Kihara; Edit by Shri Navaratnam