TOKYO The Bank of Japan is expected to keep monetary policy steady next week and consider revising up its assessment of the economy as exports find some relief from recent declines in the yen and a pick-up in global demand, sources familiar with its thinking said.
Prime Minister Shinzo Abe, who has the power to fill three top BOJ posts opening up next month, is keeping up pressure on the central bank to take bold action to achieve its new 2 percent inflation target and revive the fragile economy.
But the BOJ is seen holding off on expanding stimulus at its rate review on February 13-14, the sources said over the course of this week, to take time to review the effect on the economy from monetary easing steps taken in the past few months.
It may even stand pat next month and wait until the first policy-setting meeting under a new BOJ governor in April, unless the yen makes a sudden rebound and hurts the outlook for the export-reliant economy, they said.
"It's too early to be too optimistic about the outlook. Still, there are more signs that Japan's economy is out of the woods," said one of the sources, who spoke on condition of anonymity because they are not authorised to speak publicly.
Abe has said he will choose a new BOJ leadership more keen to take bold measures to beat deflation when the terms of Governor Masaaki Shirakawa and his two deputies end on March 19.
The final rate review under Shirakawa will be held on March 6-7, while the first one under a new governor is scheduled for April 3-4.
With factory output and exports showing some signs of life, the central bank will also consider offering a slightly more upbeat view of the economy at next week's meeting compared with that in January, the sources said.
In the previous month, the BOJ said the economy was weakening. It may change that wording to say growth is bottoming out, reflecting recent encouraging signs in the global economy.
The BOJ doubled its inflation target in January and made an open-ended commitment to buy assets from next year. That was the fourth monetary expansion in five months, taken largely in response to Abe's relentless calls for bolder action to beat deflation that has plagued Japan for much of the past decade.
Financial markets expect the central bank to ease policy more aggressively, but only after Abe replaces the conservative Shirakawa with a more aggressive deflation fighter.
Politics aside, recent positive signs in the economy are giving the BOJ some breathing space, at least for now.
With the global economic recovery still wobbly, many central bankers remain mindful of risks to the outlook and are ready to ease policy further if necessary.
But they are increasingly convinced the world's third-largest economy is slowly but steadily emerging from stagnation, thanks in part to recent yen falls and stock price gains that help boost exporters' profits and brighten sentiment.
BOJ Deputy Governor Hirohide Yamaguchi said last month the economy is expected to resume a recovery around the middle of this year, while board member Takehiro Sato said the economy will see some degree of improvement from April.
"The recession that began in April last year seems to have ended in November," Sato told business leaders in Gumma, eastern Japan, on Wednesday.
(Additional reporting by Sumio Ito and Yoshifumi Takemoto; Editing by Kim Coghill)