ALSO READBoJ's Funo says bank no longer setting deadline for inflation target Japan elections: Shinzo Abe's win powers daring monetary experiment BOJ can't exit stimulus with inflation below 1%, says Governor candidate Bank of Japan keeps monetary policy steady, postpones 2% inflation deadline BOJ's Masai advocates staying with 'powerful easing', warns on side-effects
Regardless of a return to solid economic growth, the risk of sharp appreciation in the yen means Japan's central bank would be in no rush to exit its ultra-loose monetary policy, say sources familiar with the bank's thinking.
Though the BOJ officially does not target the yen as it would invite accusations of currency manipulation from G20 countries, arresting abrupt yen rises has been a priority for policymakers in supporting the export-reliant economy.
S. and European counterparts emerging from their easing cycles.
Perpetuating the ultra-easy stance would also leave the BOJ with scant ammunition to fend off a recession if the global environment turns sour.
With financial institutions complaining of the hit from ultra-low rates on their margins, the BOJ too has been dropping subtle hints it could edge away from crisis-mode stimulus earlier than expected.
That is unsurprising with consumption picking up, the economy expanding an annualised 2.5 percent in July-September to mark the best uninterrupted run of growth in 16 years and job availability nearing a 44-year high.
But any hike in the BOJ's yield targets, which could come next year, would be a modest, one-off move rather than the start of a full-fledged rate hike cycle, the sources said.
"With the inflation outlook uncertain, there's no need to rush," said one of the sources.
RECURRING POLITICAL PRESSURE
Many analysts expect core consumer inflation, now at 0.8 percent, to slow next year unless firms pay heed to Prime Minister Shinzo Abe's calls to hike wages by 3 percent - no easy task given how wary they had been in raising salaries so far.
While Governor Haruhiko Kuroda has signaled the bank could adjust rates before his price target is met, many policymakers feel that inflation needs to exceed 1 percent to even ponder a rate hike, the sources say.
An impending leadership change at the BOJ, as Kuroda ends his term in April, further complicates the outlook since candidates for the job include Abe's former aide Etsuro Honda - a vocal advocate of aggressive easing.
Whenever the yen has spiked, BOJ officials have come under political pressure to act. Kuroda's predecessor, Masaaki Shirakawa, was heavily criticised for being too slow in responding to the pain from sharp yen gains.
The priority Abe puts on stock prices also makes it hard for the BOJ to slow purchases of exchange-traded funds (ETF), despite criticism from investors it is distorting prices.
By raising its yield targets and slowing asset purchases next year, the BOJ could stock up some tools to fight any shocks to the economy, analysts say.
Otherwise, it may be forced to deepen negative rates, a hugely unpopular move that may destabilise the banking system, or opt for extreme steps like bankrolling government debt, they say.