The Bank of Japan kept monetary policy steady on Thursday, saving its limited options to support growth for when there is more evidence that damage from last month's earthquake is proving bigger than expected.
But in a surprise move, Deputy Governor Kiyohiko Nishimura proposed expanding the BOJ's pool of funds for asset buying and market operations by 5 trillion yen ($61 billion), to 45 trillion yen.
The proposal was rejected by a vote of one to eight. It is very unusual for a proposal by one of two deputies of the BOJ governor to be rejected.
Nishimura's proposal, and the fact that it was rejected by a majority vote, was a surprise. It's quite rare in the history of the BOJ for the views of the governor and deputy governors to be split, said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.
Nishimura probably sees the medium- and long-term risks from the quake as bigger than other board members.
The May rate review will be closely watched for whether the BOJ will ease monetary policy further. There is a possibility it may lean toward expanding the asset-buying scheme.
Supply chain disruptions, power outages and damage to sentiment from a nuclear plant crisis have hit factory output and household spending, which plunged at a record pace in March.
But the central bank feels it acted pre-emptively on such shocks to the economy by loosening policy just days after the March 11 disaster.
As widely expected, the nine-member board voted unanimously to keep the policy rate unchanged at a range of zero to 0.1 percent and held off on additional monetary easing steps.
It also announced details of a 1 trillion yen loan scheme unveiled earlier this month for commercial banks in the quake-hit region, saying applications for loans would be accepted until the end of October.
Markets are focusing on how the BOJ would paint the outlook for the economy in its twice-yearly outlook report due out at 3 p.m. (0600 GMT), which will include fresh GDP and consumer price forecasts for the current and next fiscal years.
In its first forecasts since the quake, the BOJ is likely to sharply cut its economic projection for the current fiscal year, which began on April 1, from a 1.6 percent expansion projected in January.
But it is seen revising up its growth projection for the following year and sticking to its view that, while uncertainty over the quake's impact is high, Japan's economy will resume a moderate recovery next fiscal year.
EYES ON DOMESTIC DEMAND
Still, the BOJ will likely stress that it will keep monetary policy ultra-loose and that it stands ready to act if damage from the disaster threatens Japan's return to a moderate economic recovery.
Factory output fell 15.3 percent in March, exceeding the record pace of the fall after the Lehman shock in 2009, although manufacturers surveyed by the trade ministry expect production to rise in April and May.
Industrial output may not return to where it was before the earthquake until October-December. Companies that rely heavily on the supply chain are in bad shape, said Kiichi Murashima, an economist at Citigroup Global Markets Japan.
If the drop in production leads to knock-on effects, such as companies giving up on capital expenditure, that could prompt the Bank of Japan to move. Still, the government has a bigger role to play than the BOJ, because it must plan rebuilding of damaged areas.
The BOJ may nudge up its consumer price index forecasts in the outlook report to reflect recent rises in commodity costs, but stress that supply-driven inflation alone will not shake its commitment to an ultra-easy monetary policy.
The Japanese central bank's rate review came after the U.S. Federal Reserve signaled on Wednesday that it was in no rush to scale back its support for the economy with the labor market still on the mend.
Japan is facing its worst crisis since World War Two after the 9.0 magnitude earthquake and subsequent tsunami devastated its northeast coast last month, triggering a nuclear plant crisis and power outages that hit factory output.
The BOJ eased policy days after the quake by doubling to 10 trillion yen its purchases of financial assets. That raised the total pool of money set aside for a scheme that also includes funds for fixed-rate market operations to 40 trillion yen.
Nishimura is likely to have called for boosting asset purchases to 15 trillion yen, although it was unclear from the statement whether that was the case or whether he wanted the amount of fixed-rate operations to be increased instead.
If the central bank were again to ease policy, the most likely option would be to boost the asset buying fund once more.
Exports and retail sales have slumped, suggesting the effects of the disaster are already being felt in an economy that was just emerging from a lull.
The BOJ feels there is little that monetary policy can do when supply constraints, rather than weak demand, are the main damper to growth -- as is the case now.
The next trigger for monetary easing would thus be fresh evidence that supply constraints are hurting domestic demand enough for the economy to undershoot the BOJ's forecasts.
The BOJ hopes to scrutinize the impact of the quake on the economy in April and May, so it may stand pat on policy until July, when data for those months will have been released.
For the time being it will focus on measures aimed at encouraging banks to lend more to companies hit by the quake, sources familiar with the central bank's thinking said. ($1 = 81.515 Japanese Yen)
(Additional reporting by Rie Ishiguro, Tetsushi Kajimoto, Stanley White and Kaori Kaneko; Editing by Edmund Klamann)