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Bank of Japan Holds Fire, Braces for New Leadership

Bank of Japan headquarters in Tokyo, Japan
Tomohiro Ohsumi | Bloomberg | Getty Images
Bank of Japan headquarters in Tokyo, Japan

The Bank of Japan kept monetary policy unchanged on Thursday, holding fire to wait for new leaders who are expected to usher in bolder measures to try to end nearly 20 years of mild deflation.

The result was by unanimous vote and in line with market expectations.

Investors think new stimulus measures will come at the BOJ's next meeting on April 3-4, when Asian Development Bank President Haruhiko Kuroda, a vocal advocate of aggressive easing, is expected to have taken over as governor.

(Read More: An Aggressive Bank of Japan Sooner Than You Think)

At the meeting, BOJ board member Sayuri Shirai proposed bringing forward open-ended government debt purchases planned for next year. While she was voted down 8-1, her proposal was seen as a harbinger of the changes coming to monetary policy.

"Today's decision came as no surprise, but the fact that Shirai proposed bringing forward open-ended JGB purchases has laid the groundwork for further monetary easing at the bank's next policy review under the new leadership," said Junko Nishioka, chief Japan economist at RBS Securities.

"Even though the proposal was rejected today, it could be put forward again at the next policy meeting in April and adopted given that BOJ governor nominee Kuroda has floated a similar idea in parliament."

The BOJ revised up its assessment of the economy, saying it was bottoming out, which was slightly more positive than last month's view that the economy appeared "to have hit bottom."

The policy meeting was the last for Governor Masaaki Shirakawa and his two deputies. They leave on March 19 after a five-year term spent battling crises including the aftermath of Lehman Brothers' collapse in 2008 and the devastating March 2011 earthquake in Japan.

Shirakawa will hold a news conference, with his comments expected to come out sometime after 4:15 p.m. (0715 GMT).

Policy Pressure

Board member Ryuzo Miyao proposed continuing the BOJ's policy of keeping interest rates virtually at zero until the central bank's target of 2 percent inflation is in sight. His proposal was voted down 8-1.

"With advocates of aggressive policy coming to the board, the BOJ will be increasingly leaning to further easing at the next meeting onwards," Nishioka said.

"The next likely steps will be to bring forward open-ended purchases of government debt as well as topping up the amount of asset purchase programme."

The revision to economic assessment is unlikely to relieve pressure on the BOJ's new management to come up with more innovative ways to end deflation.

(Read More: Markets Just Can't Get Enough of the Abe Trade)

Facing relentless pressure from new Prime Minister Shinzo Abe for bolder efforts to revive the economy, the BOJ doubled its inflation target to 2 percent in January and made an open-ended pledge to buy assets from next year.

Under Shirakawa, the BOJ agreed to buy assets or make loans totaling 101 trillion yen ($1.08 trillion) by the end of this year, part of which includes buying government bonds with a maturity of up to three years.

Abe nominated Kuroda to shake up the BOJ, and parliament is expect to confirm his appointment later this month. In a confirmation hearing this week, Kuroda advocated in a buying longer-dated Japanese government bonds to help end deflation.

Abe's push for bolder monetary stimulus has helped weaken the yen to a near three-year low against the dollar, giving the export-reliant economy some relief and the BOJ some breathing space. ($1 = 93.5200 Japanese yen)

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