Pressure is mounting on the Bank of Japan to respond with action to the Fed's historic step of setting an inflation target and its extended commitment to near-zero rates, though for now bankers in Tokyo still seem inclined to keep their powder dry.

Yet next week's policy decision may be a close call, with the board possibly weighing further monetary easing or setting a more specific inflation goal in the face of politicians' calls for more steps to support the economy.

Finance Minister Jun Azumi weighed in on Wednesday, saying that while it is up to the BOJ to decide what to do and that pumping too much money into the market could hurt confidence in the yen, not easing policy could be a tough choice to make.

Many central bankers are hesitant to act now with no fresh data warranting a change to their view that Japan's economy is headed for a moderate recovery, and with recent positive U.S. indicators easing fears of a global economic downturn, people familiar with the BOJ's thinking said.

With rates virtually at zero, central bankers also want to save ammunition in case Europe's crisis flares up again, spilling over to global credit and financial markets.

But the BOJ will keep its finger on the trigger, ready to react to a market shock -- such as a collapse of a Greek debt restructuring deal or the yen's new surge to record highs.

Growing political pressure also means that even if the BOJ holds off on easing next week, it may loosen policy in March to support the fragile economic recovery.

Here are possible outcomes from its February 13-14 meeting:


Less than three weeks since the previous meeting, the BOJ sees no major change to the economic outlook and risks, counting on fiscal spending on reconstruction from last year's earthquake to sustain moderate recovery later this year.

In addition, the yen is off its recent peaks near record highs and Tokyo stocks are holding up, which many central bankers feel buys them time to assess the potential impact on Japan of Europe's debt crisis and the yen's persistent strength.

MARKET IMPACT: No big moves in bond yields or the yen.


The central bank may decide to be more explicit about its goals following criticism from lawmakers that the BOJ is too vague in its commitment to end deflation and after the Federal Reserve last month started to publish a specific inflation target.

The BOJ pledges to keep ultra-low rates until an end to deflation is in sight and defines desirable long-term price growth as consumer inflation of 1 percent. It is due to review that loose price goal in April as a regular practice.

But it is under growing pressure to do more, both from lawmakers who may face a snap election later this year and the government worried that the economy may not be robust enough to stomach tax increases proposed to fix stretched public finances.

The BOJ feels the heat and recognises the need to make its policy goals easier to understand. It may thus move forward its review of the price goal and consider strengthening the bank's commitment to ultra-low rates and its pledge to beat deflation or making 1 percent inflation a clearer target.

MARKET RESPONSE: Bond yields and the yen may briefly fall but the moves will likely be short-lived.


Last time expectations of aggressive Fed easing drove up the yen in 2010, the BOJ took heat from being too slow to respond. It is determined to prevent that from happening again, so it is poised to ease on any signs the yen's climb is gaining momentum.

A few pessimists on the board may call for immediate action if the yen climbs in the run up to the meeting and stock prices slump. If political pressure mounts, the BOJ may consider easing to avoid facing further heat, regardless of yen moves.

If it were to act it would most likely expand its 55 trillion yen (449 billion pound) asset buying programme, mostly via more purchases of government bonds.

MARKET IMPACT: The yen and bond yields may briefly fall but the moves will be short-lived as the only surprise will be the timing of the decision.


Mindful of political pressure, which may intensify if the authorities feel that U.S. criticism of Tokyo's past interventions makes more yen-selling actions problematic, the BOJ is quietly examining other options.

But there is no consensus or concrete plans yet on what an alternative course of action could be and the BOJ remains reluctant to go down the often suggested route - boost buying of long-term government bonds or revive full-scale quantitative easing targeting funds parked with the central bank.

MARKET IMPACT: Bond yields and the yen may fall sharply.

(Editing by Tomasz Janowski)