The Bank of Japan offered to pump a record $183 billion into the money market on Monday and may ease its ultra-loose policy further to calm markets after a massive earthquake hit the country's northeast, killing thousands and triggering a nuclear crisis.
Sources familiar with the matter told Reuters the central bank would discuss policy easing at its meeting that got under way on Monday amid news of another explosion at one of the country's nuclear reactors.
The central bank's policy board will likely discuss whether the sharp fall in Tokyo stock prices and the potential damage from the quake to corporate profits warrant an immediate policy response, the sources said.
But whether it will actually ease policy is uncertain as Governor Masaaki Shirakawa likely did not have enough time to gain consensus within the board for any immediate action.
Damage estimates also remain sketchy. Many factories have been forced to shut in the area due to power outages, while others have reported flooding or quake damage.
If the BOJ were to act, the most likely step would be to expand its 5-trillion-yen pool of funds, put in place last year to buy assets ranging from government bonds to private debt.
But some analysts say the BOJ may go even further, given the escalating damage of the quake.
The BOJ is likely to take bold steps to stabilize the financial system and is likely to revert to quantitative easing or zero interest rate policy to respond to the unprecedented crisis, said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
If it were not for the earthquake, the BOJ's next step would have been to increase its asset buying program. But doing so this time is likely to disappoint markets.
Tokyo's stocks plunged as much as 5 percent after the market reopened on Monday as investors tried to gauge the huge economic cost of Friday's quake and tsunami wiped out whole villages and towns and likely killed more than 10,000 people.
Moody's ratings agency said it saw no major disruption to Japan's payment system but that the economic fallout from the disaster appeared greater than initially expected, even though it was still waiting for a full assessment of the damage.
The economic consequences appear to be greater than we perhaps originally expected on Friday, Tom Byrne, Moody's senior vice president, told Reuters Insider in an interview.
The BOJ offered a total of 15 trillion yen ($183 billion), well above usual 1-2 trillion, on Monday morning to assure investors that markets will function properly.
The move is aimed at stabilizing financial markets and ensuring smooth fund settlement, a BOJ official told Reuters.
The BOJ is expected to keep its benchmark rate in the 0-0.1 percent range.
Analysts said the massive fund injections on Monday showed the central bank's determination to keep borrowing costs low and stable as investors try to gauge the economic cost of the worst crisis to hit Japan since World War Two.
The BOJ apparently is making utmost efforts to maintain order in markets with ample fund supply, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo.
The BOJ may ease policy by expanding its asset-buying fund or some other measures in the near future.
Japan is battling to prevent a nuclear catastrophe and to care for millions of people without power or water, just as a new wave of water was heading toward Japan's northeast coast and a hydrogen explosion rocked an earthquake-stricken nuclear plant 240 km north (150 miles) north of Tokyo.
(Additional reporting by Yoshifumi Takemoto in Tokyo and Raju Gopalakrishnan in Singapore; Writing by Tomasz Janowski, Editing by Kim Coghill)