TOKYO • Investors betting that the Bank of Japan (BOJ) will ease monetary policy next week could be riding for a fall as the yen's recent weakening and a government spending package take some pressure off the bank to step up its massive stimulus programme.
BOJ governor Haruhiko Kuroda's recent remarks ruling out use of "helicopter money" has also added to the uncertainty.
Market speculation of further easing spiked last week after visiting former US Federal Reserve chairman Ben Bernanke told Prime Minister Shinzo Abe that there were still "various tools available" for monetary policy to spur growth.
A Reuters poll showed 85 per cent of analysts expect the BOJ to ease on Friday next week, alongside the fiscal spending boost Mr Abe is set to announce this month.
The BOJ has already implemented negative interest rates and is printing 80 trillion yen (S$1 trillion) a year to stimulate inflation after decades of deflation and stagnant growth, yet inflationary expectations appear to be weakening.
Sources said the BOJ will downgrade its assessment that underlying trend inflation is "improving steadily" next week. But there is no consensus within the bank on whether that warrants prompt action.
"It is true that underlying trend inflation lacks momentum. But what's important is for there to be signs that inflation expectations will heighten in the future," said one of the sources.
The BOJ has stood pat since it adopted negative interest rates in January, with Mr Kuroda blaming weak inflation on temporary factors like oil price falls.
He ruled out the use of "helicopter money" or directly underwriting the budget deficit to combat deflation in an interview with the BBC. It was taken to mean Mr Kuroda was quashing speculation of a further monetary easing at its next policy decision.
Yesterday, after the interview was broadcast, a BOJ spokesman said the comments repeated Mr Kuroda's usual stance on the issue.
But sliding import costs from a strong yen and weak consumption have led many analysts to predict that the BOJ will push back the two-year timeframe for hitting its price target, and ease more.
"If the BOJ postpones the deadline again, it would exceed Kuroda's term. Many people think that doing nothing under such conditions would be unacceptable," said Meiji Yasuda Life Insurance chief economist Yuichi Kodama. Mr Kuroda's term as governor ends in April 2018.
Some analysts think given calls by Group of Twenty nations for members to avoid relying excessively on monetary policy to spur growth, the BOJ might sit this dance out. But the bank risks triggering a market backlash if it fails to meet investors' expectations for easing.
"The BOJ won't ease just because markets have factored in action," said one of the sources. "That's not monetary policy."