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Wilting Yen Points to Easing, but Japan May Wait

Monday, 19 Nov 2012 | 4:09 AM ET

Expectations for aggressive monetary easing by the Bank of Japan (BOJ) are driving the yen lower, but economists rule out such policy action when the central bank concludes a two-day policy meeting on Tuesday.

Bloomberg | Getty Images

While the need for further easing is rising given Japan's sharp economic slowdown, analysts say the BOJ will wait to see what impact recent monetary stimulus measures are having first. It may also want to see what the U.S. Federal Reserve, which meets on Dec. 11-12, does next.

"It is unlikely we will see any further increase in the asset purchase program this year, as policymakers are in wait-and-see mode to determine the effects of past policy changes," David Rea, Japan economist at Capital Economics, wrote.

The BOJ has eased policy twice in the same number of months, expanding its asset purchase program by 10 trillion yen ($126 billion) in September and increasing the ceiling by a further 11 trillion yen in October. Last month, the central bank also launched a new loan program, offering banks cheap long-term loans.

Pressure to deliver more aggressive policy stimulus has risen as Japan's economy takes a step closer towards recession amid weak exports and faltering private consumption.

In the third quarter, Japan's gross domestic product contracted 0.9 percent from the previous three months.

(Read More: Economic Woes Turn US, Japan Into Ugly Stepsisters)

Pressure to Act

Shinzo Abe, head of the opposition Liberal Democratic Party and a leading contender to become Japan's prime minister, last week called for unlimited monetary easing to spur inflation. The current inflation target is 1 percent, but Abe wants to raise it to 2 percent to 3 percent.

Abe said if he were to take power, there must be "policy coordination" between the government and central bank, adding that he could consider revising a law guaranteeing central bank independence from political interference.

(Read More: Prepare for 'Seismic Shift' in Japan's Politics and Economy)

The comments, made last Wednesday, have fueled market expectations for further monetary easing and knocked the yen down more than 2.5 percent against the dollar. On Monday, the yen fell to its lowest level in about seven months versus the greenback.

(Read More: Days of Strong Yen Numbered?)

Market experts, however, remain uncertain about whether Abe will be able to undermine the independence of the BOJ and dictate the direction of monetary policy.

While Masayuki Kichikawa, Japan Economist at Bank of America/Merill Lynch, believes the BOJ will likely come up with additional accommodative measures at its December policy meeting, he expects the central bank to increase its asset purchase program by an additional 10 trillion yen, and extend the maturities of Japanese government bonds eligible for purchase to five years from three.

Kichikawa, however, noted that Japanese companies have plenty of cash at the moment, and that monetary easing is unlikely to lead to much growth in corporate lending.

Izumi Devalier, Japan economist at HSBC agrees that more action could be warranted as early as December, once the policy board has evaluated the Fed's next move.

He added that the central bank will also update its economic forecasts for fiscal year 2014 when it releases an interim assessment in January, creating another opening for easing.