TOKYO, Aug 7 - The Bank of Japan board began a two-day meeting on Thursday, and while policy-makers may be concerned at renewed weakness in the stock market, upbeat economic data should mean no change in monetary policy. With short-term interest rates already virtually zero, BOJ Governor Toshihiko Fukui is seen keeping his cards close to his chest ahead of banks' half-year book-closings in September. "The BOJ can be expected to keep policy unchanged for now," said Mamoru Yamazaki, chief economist at Barclays Capital. "It really depends what happens next month." If during the run-up to bookclosings the stock market's key Nikkei average <.N225> revisits 20-year lows it set in April, worries about a banking crisis could flare up as mountains of non-performing loans weigh on banks' balance sheets. Instability in the government bond market since June is also a concern, given banks' massive bond holdings. In addition, Japan's economic recovery is also heavily dependent on a U.S. recovery, which may not be all that certain given a mixed bag of recent U.S. economic indicators. The Nikkei stood at 9,258.29 at midday on Thursday, down eight percent from last month's peak of 10,070, its highest level in nearly a year. In April, it hit two-decade lows near 7,600.
EASING STEPS
Since Fukui took the BOJ helm on March 20, the day war broke out in Iraq, he has sought to deflect criticism that the central bank is dragging its feet in wiping out deflation, which has plagued Japan's economy for more than four years. Within days of the start of his tenure he called an unprecedented emergency meeting at which the BOJ decided to boost the amount of stocks it buys directly from commercial banks. The buying is intended to reduce banks' exposure to stock market volatility. The BOJ has since eased monetary policy twice, most recently in May after the government decided to bail out Resona Holdings <8308.T>, the nation's fifth-largest banking group. Under its "quantitative easing" policy, the BOJ floods the financial system with liquidity, including buying 1.2 trillion yen ($10 billion) in long-term JGBs a month. It keeps banks' current account reserves at the BOJ at 27-30 trillion yen. The BOJ has also started including purchases of asset-backed securities (ABS) in its market operations, responding to criticism that JGB buying was not enough to revive the economy. The aim is to buy securities backed by the commercial credit of small businesses so they can rely less on banks -- under pressure to cut non-performing loans -- for funds. Fukui has said the BOJ is considering further steps so that its easing will help generate more demand. But it is unclear what the BOJ can do to get more funds past the clogged banking system. Fukui and other Policy Board members have continued to express caution about unconventional steps such as buying foreign bonds, equity funds, or deliberately causing inflation.