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Unpredictable market reactions leave BOJ in bind

TOKYO -- Although weakening economic conditions in Japan seem to merit further monetary easing, the Bank of Japan's options risk adding to the turmoil, leaving the central bank stuck between a rock and a hard place.

     The results of the March Tankan business sentiment survey released Friday indicate a loss of confidence. But a top BOJ official said the decline was "within expectations," suggesting that the central bank considers it unnecessary to adjust its views significantly.

     "We're not about to head into a recession," Gov. Haruhiko Kuroda told the lower house financial affairs committee Tuesday, stressing that the economy is still recovering gradually.

     The BOJ decided in late January to adopt negative interest rates in response to mounting economic risks. Even though some of these have come to pass, the bank seems to see no need to leap into action again.

     But some argue that the BOJ has opted against pushing rates further below zero not because it does not want to do so, but because it cannot. Since the policy does not enjoy broad support, bringing rates further into negative territory could end up weighing on stock prices or consumer sentiment, said Izuru Kato of Totan Research.

     A bank source criticized the central bank's monetary policy as too focused on ideas rather than the real world. Even if subzero rates boost demand in theory, the actual effects differ depending on how financial institutions, companies and households respond. Some contend that Kuroda's surprise-focused policy lacks this sort of attention to detail.

     The BOJ is trying desperately to drum up support for negative rates through such moves as posting a simplified explanation of the policy on its website. But this strategy has not worked as planned, with some calling it condescending.

     The yen strengthened beyond 110 to the dollar -- seen as a line in the sand that the government and the BOJ will defend -- at one point in overseas markets Tuesday. Further appreciation would heighten deflationary pressure and make business and consumer sentiment tougher to buoy. Many contend that the central bank's assertions that monetary policy has no limits will force it to step in.

     The question is how. If resistance to negative rates remains strong, additional quantitative easing is an option. But given that the central bank adopted negative interest rates partly because quantitative easing was seen as running up against its limits, shifting the focus back to that tactic could underscore the depletion of the BOJ's arsenal.

     But such doubts about the bank's capabilities may motivate Kuroda more, a market player said. Another surprise from the BOJ chief could be in store.

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