By Ritsuko Ando
TOKYO, June 26 - If Bank of Japan Governor Masaru Hayami's recent comment that the economy was getting too much water and not enough sunshine is any indication, the bank will decide against easing its super-loose policy further on Thursday.
Remarks on Tuesday from Finance Minister Masajuro Shiokawa commending the BOJ's judgment on monetary policy also seem to show that the government is taking a step back this time to allow the central bank to discuss monetary policy without the overt political pressure it faced last time.
Economists say, however, that pressure for more easing is likely to persist in the medium term. Not only is Japan reeling under an incessant flow of weak economic data, but a government panel last week explicitly urged the BOJ to be flexible on policy to help ease the pain of reforms being planned under Prime Minister Junichiro Koizumi.
"The BOJ Policy Board will probably wait and see how structural reforms, or banks' non-performing loan write-offs, develop," said Shuji Shirota, economist at Societe Generale in Tokyo.
"But we still predict further moves by the BOJ in September."
DOUBTS ON BENEFITS
The BOJ shifted to a so-called quantitative easing in March, boosting the target of banks' deposits to five trillion yen ($40.36 billion) from four trillion by parting with traditional interest-rate targeting. By doing so, it effectively returned to the zero-rate policy which it abandoned last August.
Additional steps could include raising the targeted amount of current account deposits parked at the central bank and expanding its outright buying of Japanese government bonds (JGBs).
Politicians have also mentioned as options setting an inflation target and allowing the yen to weaken, although the prior is seen less likely, while the latter is under the Finance Ministry's jurisdiction.
BOJ Governor Hayami has said he would continue watching the impact of the March move on financial markets, while also arguing that fundamental economic reforms were vital for the easy policy to work. Many see that argument as Hayami's tool for deflecting political pressure to do more.
Last week, he likened Japan's economy to a potted plant with too much water and not enough sunshine and fertiliser, saying: "If we pour more water on it, it might even be a minus."
Indeed, BOJ's offering of free money has recently been facing scant demand, since banks are still hesitant to lend.
And with short-term rates already near zero, economists say there is little room left for manoeuvring.
"The BOJ doesn't have many options left, and the impact of any easing would be limited as well," said Masaaki Kanno, chief economist at JP Morgan Securities in Tokyo.
LESS PRESSURE NOW
The BOJ's last meeting in mid-June met ever-louder calls to ease, partly since the government had just announced that the economy shrank in the January-March quarter, despite expectations for a small growth.
The government has said it expects more weakness ahead, but toned down its calls for BOJ action to focus more on economic and fiscal reforms.
"The BOJ is doing its job with a cool head and we are monitoring developments," Shiokawa told reporters on Tuesday. "The BOJ is making the right judgments."
Asked if the government would ask for further easing at this point, he said: "We're not going to say anything like that."
Still, with data over the next few months likely to continue highlighting the economy's debility, policymakers could again start piling pressure on the BOJ to act.
Economists predict the BOJ's "tankan" survey on business sentiment, due for release next Monday, to show pessimism is on the rise. A poll produced a median forecast of minus 16 for the diffusion index of big manufacturers, compared to minus five in March.
The closely watched index subtracts firms reporting unfavourable conditions from those giving favourable responses.
The BOJ's resistance to ease more may also wind down in the near future. Policy Board member Kazuo Ueda left the possibility for more easing open last Friday, saying in an interview with that the bank had not run out of effective policy tools.
Thursday's board meeting is also the first to be attended by new appointee Shin Nakahara. A former deputy president of the Bank of Tokyo-Mitsubishi, Nakahara has also said the central bank had not yet run out of options.
Economists agreed that new action on Thursday could not be ruled out, since Hayami's comments have in the past betrayed market expectations.
After Hayami repeatedly insisted there was no need to act, the bank rapidly eased policy on three occasions earlier this year, culminating in its March decision on quantitative easing. ($1=123.89 Yen)