October 30, 2019 / 9:03 PM / 17 days ago

BOJ may hold fire as softer yen, trade truce offer respite

* Policy decision expected 0330-0500 GMT

* Gov Kuroda to keep up warning of near-term easing

* Some analysts see chance of tweak to forward guidance

* BOJ to cut inflation forecasts in quarterly review

* Kuroda to brief media 0630 GMT

By Leika Kihara

TOKYO, Oct 31 (Reuters) - The Bank of Japan will likely hold off on expanding stimulus on Thursday, as calm markets and easing Sino-U.S. trade tensions take the heat off the central bank from using its limited monetary arsenal to fight the risk of recession.

But Governor Haruhiko Kuroda is likely to reinforce the central bank’s readiness to act if signs grow that the economy is losing momentum to push up inflation to its 2% target, analysts said.

Some market players bet the central bank could modify its forward guidance - or a pledge on future monetary policy - and strengthen its commitment to keep interest rates ultra-low.

Many analysts expect the BOJ to refrain from aggressive steps, such as a deepening of negative rates. Japan’s economy grew an annualised 1.3% in April-June and is expected to have sustained an expansion in the third quarter as robust domestic demand made up for some of the weakness in exports.

“With the dollar trading firmly against the yen, digging deeper into negative interest rate territory may just further erode bank earnings and destabilise the financial system,” said Katsunori Kitakura, a strategist at Sumitomo Mitsui Trust Asset Management.

“These potential side effects make it very difficult for the BOJ to take further accommodative action,” he said.

The dollar has risen to nearly 109 yen, well off a low around 104 yen hit in August and the 100-yen-mark seen as the BOJ’s line in the sand.

At its two-day meeting ending on Thursday, the BOJ is widely expected to maintain a pledge to guide short-term interest rates at -0.1% and the 10-year government bond yield around 0%.

The board will also likely discuss whether to stick to the BOJ’s pledge to maintain current ultra-low rates at least until the spring of 2020.

ULTRA-LOW RATE RISKS

The BOJ has recently stepped up its rhetoric on the chance of near-term easing, as the global slowdown and trade tensions hurt Japan’s export-reliant economy. In July, it pledged to act pre-emptively to fend off risks that could knock the economy off the path toward achieving its price goal.

That was followed by a warning last month that the BOJ would use its October rate review to look more thoroughly at overseas risks, stoking market speculation of immediate action.

But conditions have improved since then. While Kuroda conceded a pick-up in global growth will be delayed, a pause in the Sino-U.S. trade war and a global stock market rally have offered some relief to Japan’s central bankers.

While doves in the nine-member board may call for action, the hurdle for deepening negative rates is high given the strain ultra-low rates is already inflicting on commercial banks.

S&P Global Ratings warned on Tuesday that Japanese regional banks will see core operating profits fall by 21% if the BOJ deepens negative rates.

Some analysts say the key for the BOJ may be less about when to ease and more about making its framework sustainable, so that it can sustain its ultra-loose policy for the long period necessary to hit its inflation target.

In fresh quarterly projections due on Thursday, the BOJ is likely to cut its inflation forecasts as falling oil costs and soft household spending weigh on price growth.

Jin Kenzaki, senior economist at Natwest Markets Securities Japan, predicts the BOJ could take a range of steps including tweaking its bond-buying operations so it can more effectively push down short-term rates - without causing an unwelcome fall in super-long yields that hurts investors.

“The BOJ will be forced to cut its price forecasts and if so, it would make sense to take steps now to make its policy framework more sustainable,” he said.

“The BOJ probably won’t deepen negative rates. But I’m not sure whether it can get away with doing nothing this time.” (Reporting by Leika Kihara Editing by Jacqueline Wong)

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