January 20, 2020 / 9:00 PM / a month ago

BOJ to hold fire on receding pessimism over global outlook

* Policy decision expected 0230-0430 GMT

* BOJ to keep interest rate targets, guidance unchanged

* Board seen slightly nudging up FY2020/21 growth f’cast

* BOJ Governor Kuroda to brief media 0630 GMT

By Leika Kihara

TOKYO, Jan 21 (Reuters) - The Bank of Japan is set to keep monetary policy steady and signal its cautious optimism over the global outlook on Tuesday, reinforcing market expectations that the rising cost of prolonged easing will keep the hurdle for further stimulus high.

Easing Sino-U.S. trade tensions and receding pessimism over the global economy could shift the focus of debate within the BOJ towards the strains imposed on the country’s banking system by negative interest rates, some analysts say.

A majority of economists recently polled by Reuters said the BOJ’s negative rate policy has had little positive impact on the economy, and that its next move would be to taper its massive stimulus as early as next year.

The view suggests that criticism over the controversial policy is spreading beyond Europe, where countries such as Switzerland are under pressure to adjust ultra-loose monetary settings to address the downside of negative rates.

Markets will scrutinise BOJ Governor Haruhiko Kuroda’s post-meeting briefing for clues on how his views on the pros and cons of his stimulus could affect policy decisions this year.

While Kuroda may offer a slightly upbeat view on global prospects than last month, he is seen reiterating the BOJ’s resolve to keep policy ultra-loose to support a fragile recovery, analysts say.

“Even if inflation isn’t accelerating, the BOJ will probably conclude there’s no need to ease policy since it can revise up its growth forecast and sees little risk of a yen spike,” said Hiroshi Ugai, chief economist at JPMorgan Securities Japan.

At the two-day rate review that ends on Tuesday, the BOJ is set to keep its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0%.

It is also seen maintaining a guidance that commits to keeping rates at current low levels, or even to cut them, until risks keeping it from achieving its 2% inflation goal subside.

At a quarterly review of its projections, the BOJ is likely to slightly revise up its economic growth forecast for the fiscal year beginning in April thanks to an expected boost from the government’s spending package.

Japan’s economy ground to a near halt in July-September and is likely to have contracted in the final quarter of last year as the U.S.-China trade war knocked exports.

BOJ officials hope the government’s $122 billion fiscal package and robust capital expenditure will offset the hit from soft global demand and supply chain disruptions from last year’s typhoons that continue to weigh on factory output.

Analysts and policymakers are also watching to see the impact on global growth from last week’s preliminary trade deal signed between China and the United States to defuse their bitter tariff war.

Pessimists in the BOJ, however, fret that weak global auto demand and the drag on consumption from October’s sales tax hike to 10% from 8% may mean only a modest rebound in January-March growth.

As tame inflation forces the BOJ to keep policy ultra-loose, its nine-member board is divided between those who see room to ramp up stimulus and others concerned of the hit to financial institutions’ profits from years of near-zero rates.

Reporting by Leika Kihara Editing by Shri Navaratnam

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