December 18, 2019 / 9:03 PM / a month ago

BOJ to keep policy steady on easing trade tensions, may warn of soft output

* Policy decision expected 0230-0430 GMT

* BOJ likely to keep short-, long-term rate targets steady

* Board seen sticking to view economy expanding moderately

* Governor Kuroda to brief media 0630 GMT

By Leika Kihara

TOKYO, Dec 19 (Reuters) - The Bank of Japan is expected to keep monetary settings steady on Thursday and maintain its upbeat view on the economy, suggesting policymakers are in no hurry to boost stimulus even as global risks threaten to scupper a fragile recovery.

But the central bank may offer a gloomier view on factory output than at its previous rate review in October, nodding to the widening fallout from soft world demand and the U.S.-China trade war.

A decision to stand pat would keep Japan in line with the U.S. Federal Reserve and the European Central Bank, which have both signalled that monetary policy will be in a holding pattern for the time being.

“The BOJ has very few tools left to deploy even if the economy worsens,” said Hideo Hayakawa, a former BOJ executive who is now a senior economist at private think tank Fujitsu Research Institute.

“It probably won’t act unless the economy is hit by a huge external or market shock.”

At its two-day meeting ending on Thursday, the BOJ is widely expected to maintain its short-term interest rate target at -0.1% and that for 10-year government bond yields around 0%.

It is also seen sticking to a pledge to keep rates at current low levels, or cut them, for as long as needed to ensure Japan maintains momentum to reach its 2% inflation goal.

The steady policy stance is partly underpinned by moves from the United States and China to secure a preliminary trade deal to de-escalate a bruising trade war, which has hit world growth this year.

Japan’s economy, the world’s third-largest, expanded an annualised 1.8% in the third quarter on resilient domestic demand and business spending.

But factory output suffered its largest fall in two years in October and big manufacturers’ business sentiment sank to a near seven-year low in the fourth quarter, underscoring the fragile state of Japan’s recovery.

Many analysts expect the economy to have contracted in the current quarter as a sales tax hike in October cools consumption.

In a statement announcing the policy decision, the BOJ may describe output as weakening instead of its current assessment that it is “moving sideways.”

The central bank, however, is likely to maintain its view the economy continues to expand moderately as a trend as robust domestic demand offsets some of the hit to exports from overseas risks.

BOJ officials expect the government’s fiscal spending package to offer a significant boost to the economy when public works projects roll out next year, sources familiar with the central bank’s thinking have told Reuters.

At his post-meeting news conference, BOJ Governor Haruhiko Kuroda is likely to repeat the bank’s readiness to ease further if risks threaten to derail Japan’s economic recovery.

But many analysts say the hurdle for action is high given the strain prolonged ultra-low rates is heaping upon financial institutions. (Reporting by Leika Kihara Editing by Shri Navaratnam)

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