By Leika Kihara
TOKYO (Reuters) - The Bank of Japan will likely hold off on expanding stimulus on Thursday, as calm markets and easing Sino-U.S. trade tensions take the heat off the central bank from using its limited monetary arsenal to fight the risk of recession.
But Governor Haruhiko Kuroda is likely to reinforce the central bank's readiness to act if signs grow that the economy is losing momentum to push up inflation to its 2% target, analysts said.
The central bank could modify its forward guidance - or a pledge on future monetary policy - and strengthen its commitment to keep interest rates ultra-low, though any such change will be defined as more a fine-tuning of communication than an expansion of stimulus, sources have told Reuters.
Many analysts expect the BOJ to refrain from more aggressive steps, such as a deepening of negative rates, as the economy is seen sustaining a moderate expansion with robust domestic demand making up for some of the weakness in exports.
"There's no clear reason for the BOJ to act now," said Tomoyuki Shimoda, a former Bank official who is now an economics professor at Hitotsubashi University.
"Capital expenditure is firm and while inflation is soft, it's hard to judge that Japan's economy has lost momentum (to hit the BOJ's price goal)," he said.
At its two-day meeting ending on Thursday, the BOJ is widely expected to maintain a pledge to guide short-term interest rates at -0.1% and the 10-year government bond yield around 0%.
The board will also likely discuss whether to stick to the BOJ's pledge to maintain current ultra-low rates at least until the spring of 2020.
The Nikkei paper reported on Thursday the BOJ will consider modifying the forward guidance to more clearly signal the BOJ's readiness to cut rates in the future.
The BOJ's meeting follows that of the U.S. Federal Reserve, which cut rates on Wednesday but signaled there would be no further reductions unless the economy took a turn for the worse.
ULTRA-LOW RATE RISKS
In fresh quarterly projections due on Thursday, the BOJ is likely to cut its inflation forecasts as falling oil costs and soft household spending weigh on price growth.
Core consumer prices in Tokyo, a leading indicator of nationwide inflation, rose 0.5% in October from a year earlier, staying distant from the bank's target.
The BOJ has recently stepped up its rhetoric on the chance of near-term easing, as the global slowdown and trade tensions hurt Japan's export-reliant economy. In July, it pledged to act pre-emptively to fend off risks that could knock the economy off the path toward achieving its price goal.
That was followed by a warning last month that the BOJ would use its October rate review to look more thoroughly at overseas risks, stoking market speculation of immediate action.
But conditions have improved since then. While Kuroda conceded a pick-up in global growth will be delayed, a pause in the Sino-U.S. trade war and a global stock market rally have offered some relief to Japan's central bankers.
While doves in the nine-member board may call for action, the hurdle for deepening negative rates is high given the strain ultra-low rates is already inflicting on commercial banks.
S&P Global (NYSE:SPGI) Ratings warned on Tuesday that Japanese regional banks will see core operating profits fall by 21% if the BOJ deepens negative rates.
Some analysts say the key for the BOJ may be less about when to ease and more about making its framework sustainable, so that it can sustain its ultra-loose policy for the long period necessary to hit its inflation target.
"The BOJ will be forced to cut its price forecasts and if so, it would make sense to take steps now to make its policy framework more sustainable," said Jin Kenzaki, senior economist at Natwest Markets Securities Japan.
"The BOJ probably won't deepen negative rates. But I'm not sure whether it can get away with doing nothing this time."
