TOKYO -- With the U.S. and European central banks eyeing further monetary easing, the Bank of Japan faces a difficult decision on whether to follow suit in order to keep the yen from strengthening too far.
The BOJ signaled openness to the idea at its policy meeting Tuesday. But after years of ultralow rates and massive asset purchases by Japan's central bank, it is unclear how much of an impact such a move can still make -- and what the side effects would be.
"The bank will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost," the BOJ said in a statement Tuesday.
BOJ Gov. Haruhiko Kuroda told reporters later that he was "more positive" now on the option, saying that the statement went a step further than his previous statements on monetary stimulus.
Kuroda's comments "further lowered the hurdle for additional easing," said Takahide Kiuchi, executive economist at Nomura Research Institute and a former member of the central bank's policy board.
The bank is not taking action just yet. In its quarterly outlook published Tuesday, the BOJ said that consumer prices remained on track to hit the 2% target, and that it will "maintain the current extremely low levels" of short- and long-term rates.
Yet Kuroda is leaning into the option amid shifts in America and Europe. The U.S. Federal Reserve Board is expected to lower interest rates Wednesday for the first time in more than 10 years. For Kuroda, who took the helm of the bank in 2013, this will be the first time he will be faced with an American interest rate cut.
The European Central Bank also announced Thursday that it is considering another quantitative easing package.
The yen is now trading steadily around 108 to the dollar. The currency could strengthen past the 105 level by the end of the year depending on American and European actions, market insiders say.
Though Japan's economy relies more heavily on domestic consumption than before, a strong yen still would hurt key industries like automotive and electronics. This in turn could squeeze capital investment, depress stock prices and cool consumer spending -- all of which would push prices down.
The Bank of Japan is standing pat for now, partly because it remains unclear what exactly the other central banks have planned. If the Federal Reserve cuts rates further than the market expects, additional easing by the BOJ likely will do little to curb a strengthening yen.
The BOJ could take interest rates further into negative territory, lower the target for long-term rates or buy more exchange-traded funds -- or deploy a combination of these options, Kuroda said Tuesday. But not all within the bank are sold on the idea of further stimulus.
Years of ultralow interest rates are squeezing Japan's regional banks, making them more hesitant to lend. Pension funds and other investors that directly impact the public also are suffering from a lack of options.
"Should we consider specific easing measures, we will comprehensively weigh their side effects on the economy, price levels and the financial system," Kuroda said.