The Bank of Japan's (BOJ) toolkit may be running short, with the few levers left unlikely to help the central bank reach its inflation target, a former BOJ board member said.
Sayuri Shirai, whose five-year term at the BOJ ended on March 31, said Japan faced "very sluggish potential economic growth and also very low economic growth."
"Without being able to increase this potential economic growth, it's very difficult for BOJ to achieve a 2 percent [inflation target], because right now, aggregate demand and credit demand are not very large," she told CNBC's "Squawk Box" on Monday.
The outcome of Wednesday's BOJ meeting, due after 10 a.m. SIN/HK, will likely be a bigger nail-biter than usual. That's because there is such a wide range of predictions on what the central bank, which has also promised a comprehensive assessment of its current quantitative and qualitative easing (QQE) and negative interest rate policies, may do.
Those predictions have varied from expectations the BOJ will cut interest rates deeper into negative territory, to changing the size or make-up of its QQE asset purchases, to trying to steepen the yield curve or to doing nothing at all.
Shirai said doing nothing at all wasn't likely to be an option.
She noted that failing to act, especially if the comprehensive assessment found that it would take longer than the expected fiscal 2017 to achieve the 2 percent inflation target, would be inconsistent with previous communication from BOJ Governor Haruhiko Kuroda.
"I think the BOJ have to show additional action," she said, noting that previously, the central bank had said that if it appeared unlikely to reach its inflation target, it wouldn't hesitate to take further easing measures.
But Shirai, who was one of four board members who voted against the negative interest rate policy that was adopted at the BOJ's January meeting, noted the limitations of expanding existing policies.
"I don't think negative interest rates will contribute to increasing aggregate demand and also increasing inflation expectations," Shirai, who is currently a guest professor at Keio University, said. "But if Mr. Kuroda has to show some action in order to admit that it takes longer for them to achieve 2 percent, I think negative interest rate is one of only a few remaining options. Because comparing to additional QE, negative interest rate policy has less side effect."