The Bank of Japan is leaning towards scrapping some corporate finance support programmes in December, sources with knowledge of the bank's thinking said, rebuffing government pressure to delay an exit from credit markets.
To fend off criticism that the move could hurt Japan's fragile economy, the BOJ will stress that it will keep interest rates near zero and continue funneling abundant cash to the market.
The decision may come as early as its policy meeting on Oct. 30, but the BOJ may choose to wait until November if the board cannot reach a consensus, the sources said.
We've taken conventional steps for unconventional times, but we're no longer in crisis mode, one source said. Another official expressed the same view, saying the drawbacks of keeping them in place cannot be ignored.
Both have direct influence over monetary policy and declined to be named because of the sensitivity of the matter.
The BOJ had been tipped to announce it would end its corporate bond buying and other measures to cushion the shock of the financial crisis when they expire in December, joining other central banks in rolling back their emergency response to the turmoil of the past two years.
But it has come under pressure from some cabinet ministers who worry that a quick exit from emergency steps to support corporate funding would hurt the fragile economy, just now emerging from its deepest recession in 60 years.
The central bank deferred a decision last week on withdrawing support for corporate finance after some jawboning from cabinet ministers.
BOJ Governor Masaaki Shirakawa said after last week's policy meeting that credit markets were relying less on the bank's commercial paper and corporate bond purchases.
He also suggested that the BOJ's loan programme, in which it lends to banks at 0.1 percent interest in exchange for collateral, could be allowed to end in December as it has become replacable by regular market operations.
Shirakawa is among those on the board who have warned of the drawbacks of keeping the emergency steps in place for too long, such as distorting market functions.
But some on the board are wavering over the timing of the exit, worried that credit conditions could tighten again towards the March 31 fiscal year-end, when companies close their books.
If a consensus cannot be reached, the board may choose to take more time to examine financial market conditions and delay a decision until November.
BOJ officials have been drawing a distinction between the emergency funding-support steps and its easy monetary policy, which is widely expected to remain unchanged until 2011 or later.
When announcing an end to the emergency steps, the BOJ will emphasise that it will keep its ultra-loose monetary policy, possibly by issuing a statement along these lines, the sources said.
The central bank is also seen maintaining its rule of accepting a wider range of collateral in its market operations, such as corporate debt rated as low as BBB, and its programme of paying interest on the excess reserves commercial banks park at the BOJ.
Both of these steps help the BOJ pour ample funds into the money market.
The BOJ will issue its twice-yearly outlook report on Oct. 30, which forms the basis for its monetary policy decisions, and is expected to forecast three years of deflation to March 2012.