BOJ Watch: Political Pressure On BOJ Reduces Room For Inaction

-- BOJ may want to refrain from further easing action at next week's meeting
-- Inaction becoming less likely amid persistent political pressure
-- BOJ watchers say surprise February easing has made it difficult to predict timing of central bank's next move


TOKYO (Dow Jones)--The Bank of Japan may want to refrain from taking action when its policy board meets next week, having acted in the past two months. But inaction is becoming less of an option amid persistent political pressure to be proactive in the fight against deflation.

"Normally, the bank would try to gauge the effects (of recent actions)," said one person familiar with the BOJ's thinking, referring to its February move to increase bond purchases and set a near-term 1% inflation goal, and to its loan program expansion in March.

The February measures, which took markets by surprise, weakened the yen and sent share prices higher, giving the economy some breathing space.

Many BOJ watchers expect the BOJ to hold off from deciding on any new measures at its two-day board meeting from Monday, as the options are limited with interest rates already near zero.

The central bank is wary of pushing the envelope on the unconventional easing measures it has already undertaken, such as the buying of government bonds. Further purchases could raise questions about Japan's commitment to fiscal reform and lead to a spike in interest rates.

"While aggressive monetary easing is definitely needed after the bursting of bubbles, its side effects and limits should be also be taken into consideration," BOJ Gov. Masaaki Shirakawa said last month at a meeting of central bankers in Washington.

But BOJ watchers admit that the February easing--which was a surprise in that it was carried out when the BOJ was seeing an improvement in the economy--has made it difficult to predict the timing of the central bank's next move. Market participants are increasingly keeping an eye on political pressure, seen as a key factor behind the February move.

"Over the year, there would be more scope for politicans to put pressure on the BOJ, and its independence is likely to be threatened," said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo.

In a sign of such pressure, the parliament on Thursday voted down the nomination of an economist for the BOJ's policy board, as lawmakers looked for candidates more supportive of further easing.

For Prime Minster Yoshihiko Noda, ending deflation has gained more importance as he tries to push through a bill to double the sales tax by 2015 to fix the nation's deteriorating finances.

The tax hike has met strong opposition, even within Noda's ruling party, from lawmakers who say it would further weaken an economy that remains mired in deflation. After days of heated debate within the party, Noda submitted the tax increase legislation to parliament last week, promising the government will do all it can to fight deflation alongside the BOJ.

"We are strongly hoping that the BOJ will take appropriate and decisive monetary policy and we would like to continue to keep in close contact," Noda said in parliament this week.

Noda's economy minister, Motohisa Furukawa, followed up by saying he hopes the BOJ will take appropriate measures to exit deflation and realize its 1% inflation goal.

The ministers made similar remarks ahead of the February easing.

If the BOJ were to take further action, options include expanding the size of its Y65 trillion asset purchase program and buying government debt with maturity of over two years. It currently buys JGBs up to two years under the program.

The BOJ is concerned that buying such longer-term debt will be regarded as monetization, or financing government borrowing. But some government officials brush aside such concerns.

"They shouldn't be worried so much about it. Rather, the lack of further easing may threaten to change market sentiment," said one government official.

Many BOJ watchers expect any further action to come later this month when the board holds another meeting. But some said the central bank may move next week, eyeing its impact on markets.

Yasunari Ueno, chief market economist at Mizuho Securities, said he also believes the BOJ will act after its April 27 meeting, but that there is a chance the central bank will bring forward the action.

"It could move at the first meeting in April to surprise markets," Ueno said.

The BOJ will release its semi-annual economic outlook at the April 27 meeting. The outlook is expected to show that board members expect inflation to fall short of the 1% goal, giving justification for further easing, BOJ watchers said. Japan's core consumer price index rose a mere 0.1% in February from a year earlier.