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Economy

Bank of Japan unlikely to tighten before October, experts say

Some believe more easing is on the table to stoke price growth

The Bank of Japan is unlikely to make major policy adjustments until October at the earliest, BOJ watchers argue.

TOKYO -- The Bank of Japan is unlikely to veer away from its ultraloose monetary policy at least until October, five key BOJ watchers believe, despite talk that growing concern over the side effects of prolonged easing could prompt action next week.

Policy board members start a two-day meeting next Monday on the heels of reports that the bank plans to discuss a more flexible approach to guiding interest rates, aiming to lighten easing's adverse impacts on the financial sector. But major changes are more likely in a few months than next week, according to many BOJ observers.

Action "at the October meeting is a possibility," said Yuji Shimanaka of Mitsubishi UFJ Morgan Stanley Securities. By that time, consumer prices will show growth of 1% or higher by reflecting rising oil prices, according to Shimanaka.

The central bank now guides long-term rates to around zero. But it will in effect raise this target by "setting it in a range between negative 0.1% and positive 0.2%," Shimanaka said.

Drastic policy changes are likely off the table for September, since they would risk influencing the ruling Liberal Democratic Party's presidential election pitting Prime Minister Shinzo Abe against at least one challenger as he seeks to stay at the helm.

Izuru Kato of Totan Research concurs on the timing of changes. The bank "will sort out the reasons for slow price growth at the July meeting and underscore the problems with prolonged easing," Kato predicted. "Then, in October, it will widen the band in which long-term rates are allowed to fluctuate."

Mitsumaru Kumagai of the Daiwa Institute of Research believes that interest rate changes will come in 2020 or later. The yen's current strengthening trend makes a policy change difficult at present, and political events such as an upper house election in 2019 will preclude major adjustments next year, Kumagai said.

Meanwhile, some believe that instead of tightening the BOJ will actually scale up monetary easing to address stalled price growth. Next week, the bank will "introduce forward guidance saying that the 0% interest rate target will not change until consumer price growth reaches a sufficient level and inflation expectations show clear improvement," said Hiroshi Ugai of JPMorgan Securities Japan. Strengthening the bank's commitment to achieving 2% inflation in this way would in effect reinforce easing, as Ugai sees it.

"The BOJ will consider technical steps to address the side effects of easing, such as curbing Japanese government bond purchases" or adjusting the maturities of the bonds it buys, said Ryutaro Kono of BNP Paribas.

"But it won't be able to make fundamental policy changes such as an interest rate hike," said Kono, arguing that additional easing will become necessary after the end of 2019, when the current cycle of economic expansion is expected to end.

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