BOJ seen standing pat as markets welcome Fed rates lift-off
By Leika Kihara
TOKYO (Reuters) - The U.S. Federal Reserve's widely expected interest rate hike and its pledge to implement monetary tightening gradually removes one source of uncertainty for the Bank of Japan, allowing it to hold off on expanding stimulus at the year's final BOJ rate review on Friday.
But BOJ policymakers are still likely to debate lingering risks to the economic outlook that could warrant additional easing in coming months, particularly the oil price rout that is pushing down consumer prices and eroding companies' inflation expectations.
"The decline in oil prices is lasting long enough to cast doubt on the BOJ's argument that its effect on inflation is temporary and can be discounted," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
"If the BOJ pushes out the timeframe for hitting its price target again in January, it might be problematic not to ease monetary policy."
At the two-day rate review ending on Friday, the BOJ is widely expected to maintain its pledge to increase base money at an annual pace of 80 trillion yen (£431.4 billion) via aggressive asset purchases.
Many BOJ officials had anticipated Wednesday's U.S. rate hike and are likely relieved to see the Fed avoiding market upheaval with assurances that future rate hikes will be gradual.
In his post-meeting briefing, BOJ Governor Haruhiko Kuroda is seen likely to welcome the Fed hike as a sign of U.S. economic strength, and maintain his optimism that an expected pick-up in global growth will underpin Japan's recovery.
Japan's economy averted recession in July-September and many analysts expect growth to rebound - albeit modestly - as output shows signs of life.
A quarterly BOJ survey showed companies were maintaining their upbeat spending plans, offering some hope for policymakers worried that overseas headwinds could induce firms to delay new investment.
That leaves the BOJ with little reason to ease on Friday unless Kuroda opts to spring a surprise.
But the darkening price outlook is keeping BOJ officials nervous. Slumping oil prices have weighed on consumer prices and made it a near-certainty the bank will cut its inflation forecasts when it reviews its projections in January.
Companies' inflation expectations have also receded, adding to doubts on the success of the BOJ's stimulus programme that aims to spur expectations of future price rises so that firms spend more now rather than save.
BOJ board members are likely to scrutinise such risks, though many of them are hesitant to accelerate asset purchases with the BOJ already holding 30 percent of Japan's government bond issuance.
(Reporting by Leika Kihara; Editing by Eric Meijer)
