The Bank of Japan is likely to hold an emergency meeting on Monday to ease monetary policy after Governor Masaaki Shirakawa returned to Tokyo from a trip to the United States earlier than expected.
Sources had told Reuters that the BOJ was expected to hold an extra meeting early in the week to loosen policy as the strong yen threatens Japan's fragile economic recovery, and Shirakawa's early return has increased the chance of a Monday gathering.
The central bank's most likely option is to expand a fund supply programme put in place in December, through which it offers up to 20 trillion yen ($234 billion) in three-month loans to banks at the policy rate of 0.1 percent, said sources familiar with the BOJ's thinking.
But there is a slim possibility the BOJ will opt for more aggressive measures, such as increasing its government bond purchases or cutting its overnight call rate target, as some government officials are already complaining that minor tweaks to the fund supply scheme would not be enough.
The BOJ said Shirakawa arrived back in Tokyo from the United States on Sunday afternoon, earlier than planned, but did not comment on whether it would hold an emergency meeting on Monday.
The governor's schedule at the conference (in Jackson Hole) was flexible in the first place. We understand that the governor himself made the decision to change his schedule, Satoshi Yamaguchi, head of the BOJ's media relations division, told Reuters.
Prime Minister Naoto Kan said last week that he wanted to meet Shirakawa as soon as he returns from his trip to the United States, and request a flexible monetary policy response to the strong yen.
Shirakawa will meet with Kan on Monday to discuss economic and market developments, public broadcaster NHK said.
The BOJ would likely try to ease policy before the two meet to avoid giving markets the impression it yielded to government pressure, analysts say.
The BOJ has been considering easing policy, but had initially hoped to wait until its regular rate review on September 6-7 for more evidence of the damage the strong yen was inflicting on business sentiment.
But the yen's climb to a fresh 15-year high on the dollar last week and a slide in stock prices have alarmed some in the BOJ into considering action. The central bank has also been under increasing government pressure to ease policy.
Shirakawa had travelled to Jackson Hole, Wyoming, to attend a central bankers' gathering and was originally expected to return to Japan on Monday.
(Editing by Chris Gallagher)