BOJ To Cut Economic Forecasts, Signal Easing Bias - CNBC

The Bank of Japan is expected to cut its economic growth forecast on Thursday and predict a very slow exit from deflation, signalling it is ready to ease policy further in coming months if the yen's climb threatens to stunt growth.

The central bank will also detail its 5 trillion-yen ($61.46 billion) asset buying programme announced early this month and may say that it will kick it off before its next rate review in November, sources familiar with the BOJ's thinking said.

With no new steps expected just three weeks after the central bank relaxed its policy, the focus will be on its twice-yearly economic outlook report.

The BOJ is likely to cut its growth forecast for the fiscal year to March 2012 to around 1.5 percent from 1.9 percent predicted three months ago, broadly in line with market forecasts.

It will also for the first time give its forecasts for the following year, which will probably project some recovery in growth and consumer prices rising slightly less than 0.5 percent.

That, however, would still be far from the 1 percent consumer inflation rate that the BOJ wants to see before it starts lifting rates from near-zero levels, keeping alive speculation that it will try to do more to revive the sputtering economy.

Few Options

With borrowing costs at rock bottom and the government's ability to stimulate growth hobbled by public debt twice the size of Japan's economic output, policymakers have few options left to help the economy cope with the yen's strength.

BOJ Governor Masaaki Shirakawa signalled earlier this month that any further easing would probably come in the form of an increase in the pool of funds set aside for purchases of government bonds and other assets.

Expectations that the U.S. Federal Reserve will act more aggressively than the BOJ as it keeps pumping cash into the economy have driven the yen ever closer to its all-time high, prompting the likes of Toyota [TM 70.91 0.04 (+0.06%) ] and Nissan[NSANY 17.89 -0.03 (-0.17%) ] to talk about a sense of crisis in Japanese industry.

Speculation that the Fed may opt for piecemeal fund injections rather than a big-bang, large-scale operation at its Nov. 2-3 meeting has given the dollar some respite. But any Fed decision that would drive the yen past its all-time peaks could prompt further policy easing by the BOJ, sources said.

Such easing would probably come in the form of an increase to the amount of assets the central bank plans to buy. By speeding up the roll-out of the asset buying scheme, the BOJ may signal it would consider such easing as early as next month.

"Asset buying hasn't even started. But depending on market moves and the state of the economy, increasing the amount is something to look into," one of the sources said.

Analysts expect no significant upturn in the economy at least until early next year as the expiry of government subsidies for low-emission cars is set to hit factory output.

The central bank's forecasts are expected to underscore how long and slow Japan's recovery from deflation — a vicious cycle of declining prices, weak demand and investment, and stagnant output — will be.

Under the asset buying scheme, the BOJ plans to begin buying assets in several stages, starting with government bonds. It then hopes to move on to less conventional assets such as exchange traded funds, possibly by early next year, sources said.

To encourage more risk-taking, the BOJ plans to buy corporate bonds rated BBB — the lowest investment-grade bond — and a2 commercial paper, the second tier of this type of short-term debt, the sources said.