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Bank of Japan set to cut price forecasts, may expand loan schemes

Hiroshi Higuchi | Getty Images

The Bank of Japan is likely to cut its inflation forecasts on Wednesday and may expand loan schemes aimed at boosting lending, hoping to deflect criticism it is sitting idly by as a slump in oil prices pushes inflation further away from its target.

If the new inflation forecast for the next fiscal year from April falls below 1 percent, bolder action cannot be ruled out, such as a full-blown expansion of asset purchases or a cut in the 0.1 percent interest the BOJ pays on excess reserves parked at the central bank, some analysts say.

But many market participants expect the BOJ to save such options for later in the year, with its aggressive purchases already pushing five-year government bond yields into negative territory and 10-year yields to a record low below 0.2 percent.

"What more can the BOJ do? I think the central bank can hold off on action and take a wait-and-see stance for the time being," Kozo Yamamoto, a ruling party lawmaker who is among premier Shinzo Abe's close aides, told Reuters on Monday.

Less than three months ago, the BOJ justified its shock expansion of "quantitative and qualitative easing" (QQE) as aimed at preventing oil price falls and a subsequent slowdown in price rises from weighing on inflation expectations.

The move kept alive market speculation that the relentless drop in oil prices, which have nearly halved since October, will force the BOJ to ease again in coming months.

Under QQE, the BOJ has pledged to double base money via aggressive asset purchases to achieve 2 percent inflation during the next fiscal year.

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At its two-day policy review ending on Wednesday, the BOJ is set to cut its core consumer price inflation forecast for the that fiscal year to below 1.5 percent from the 1.7 percent projected in October, sources said.

But the BOJ's new forecast will probably be higher than the 0.6 percent forecast from analysts polled by Reuters, many of whom expect the bank to ease again as early as April.

Many in the BOJ's nine-member board want to hold off on expanding QQE for now. The bank may instead expand two loan schemes aimed at encouraging banks to boost lending and extend their deadlines beyond March.

In the quarterly review of its long-term projections, the BOJ is also set to revise up its economic growth forecast for next fiscal year, sources have said.

That may help the BOJ justify standing pat on policy. It hopes to argue that improvements in the economy will narrow the output gap and lead to wage rises, offsetting the temporary downward pressure from oil price falls.

The BOJ issues a semi-annual report with forecasts on the economy and prices in April and October of each year. It reviews the projections at rate reviews in January and July.