BOJ gains time from Fed tapering to assess its own easing needs

Leika Kihara
Thursday, 19 Dec 2013 | 2:08 AM ET

* Board meets Dec 19-20, decision expected Dec 20 0330-0500 GMT

* No policy action expected as economic recovery broadens

* Governor Kuroda to brief media 0630 GMT Friday

* Fed tapering may keep yen weak, support Japan CPI-analysts

TOKYO, Dec 19 (Reuters) - The Federal Reserve's smooth start in dialing down its massive stimulus without disrupting markets removes one uncertainty for the Bank of Japan, giving it more time to decide whether further monetary expansion will be needed next year, analysts say.

Markets took the Fed's decision to taper in their stride, just as many BOJ officials had anticipated given that it had become only matter of time before the U.S. central bank acted.

The Fed's move, and commitment to low interest rates, underscored the U.S. economy's brighter prospects, reducing nagging concerns some BOJ policymakers have harboured over the global economic outlook, analysts said.

With the BOJ maintaining its ultra-easy policy even as the Fed withdraws stimulus, the widening interest rate gap between the two nations will help keep the yen weak against the dollar in a relief to Japan's export-reliant economy, they said.

"I see no impact on the BOJ decision tomorrow," said Masayuki Kichikawa, chief Japan economist at Bank of America Merrill Lynch.

"But if the dollar rises to 110 or 115 yen next year, the BOJ could afford to wait before easing again, as foreign exchange would continue to make a positive contribution to consumer prices."

The Fed's decision on Wednesday and its policy implications will likely be among key topics of debate when the BOJ board meets for a two-day rate review until Friday.

In the wake of the Fed's move, the dollar swept above 104.00 yen for the first time since 2008, but the yen's slide was seen as positive for Japanese exports and profits, and helped the Nikkei climb 1.7 percent to hit its highest closing in six years.

The BOJ is widely expected to maintain its policy framework put in place in April, under which it aims to double base money via aggressive asset purchases to achieve 2 percent inflation in roughly two years.

Markets will scrutinise BOJ Governor Haruhiko Kuroda's post-meeting news conference on Friday for any hints on whether the BOJ might expand monetary stimulus next year.

Of the nine BOJ board members, two have criticised the bank's two-year timeframe for achieving 2 percent inflation as too ambitious. Another two have warned that risks to the economy were tilted toward the downside, citing risks over the global economic outlook.

While overseas uncertainties may have subsided somewhat due to the Fed's smooth start to tapering, some analysts warn that a sales tax hike in April will hit Japan's currently robust personal spending.

That has led to speculation that the BOJ may ease monetary policy around April to cushion the pain from the tax hike, although the central bank has said the economy can weather the damage without additional monetary stimulus.

The BOJ is quietly pondering policy options in case it needs to act again, but is reluctant to respond to temporary bumps having given a massive stimulus to the economy in a single dose in April.

If the U.S. economy is strong enough for the Fed to continue tapering and expectations of tighter U.S. monetary conditions keep the yen weak against the dollar, that will reduce risks from abroad and support exports, analysts say.

"The Fed's policy direction will weaken the yen and boost Japanese stocks for at least the next six months. Import prices will also rise from the weak yen and support Japanese consumer prices. All of this is good news for Kuroda," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

"If the BOJ were to ease, it's more likely in the third quarter of next year rather than the second quarter."

(Additional reporting by Stanley White; Editing by Simon Cameron-Moore)