The Bank of Japan (BOJ) will consider easing monetary policy at its next rate review on April 27 by boosting government bond purchases under its asset-buying program, sources familiar with the central bank's thinking said, as it battles to nudge consumer inflation toward its 1 percent target.
The central bank, which stood pat on Tuesday, has remained under political pressure to offer further stimulus to a fragile economy with consumer inflation hovering around zero, well below the 1 percent target it set in February.
While it is becoming more convinced that Japan's economy will soon resume a moderate recovery, the BOJ will consider easing again if it feels growth is too slow to push consumer inflation steadily toward the target.
The key would be at what pace consumer inflation will pick up on its way to that goal, said one of the sources, who spoke on condition of anonymity due to the sensitivity of the matter.
The most likely option would be to top up the bank's 65 trillion yen ($803 billion) asset-buying and loan program by 5 trillion or 10 trillion yen, with the increase used for purchases of government bonds, the sources said.
In doing so, the bank may extend the maturity of bonds it buys under the program to five years from the current two-year time-frame as two-year yields are already stuck at 0.1 percent.
BOJ, Fed balance sheets http://link.reuters.com/qyt65s
RECOVERY INTACT, PRICES KEY
The central bank will issue a twice-yearly outlook report on April 27 that will include revised long-term economic and price forecasts for up to the year ending in March 2014.
In the report, the bank will likely stick to its view that the economy will soon see a moderate recovery as spending for reconstruction from last year's earthquake disaster gathers pace and exports pick up on easing worry that Europe's sovereign debt crisis will hit global growth.
But with few signs of domestic price pressures, its price projections are unlikely to change much from a projection made in January for 0.1 percent consumer inflation in the fiscal year that began in April and 0.5 percent for the following year.
The BOJ may thus consider offering another round of stimulus to ensure that consumer inflation will pick up more steadily toward the 1 percent target, analysts say.
The BOJ will make a final decision after examining market moves up to April 27 and analyzing whether the economic recovery will be solid enough to translate into sustained rises in consumer prices in the long run, they said.
The central bank has held fire on monetary policy since surprising markets in February by increasing its asset purchases and setting a 1 percent inflation target.
But renewed expectations of further stimulus by the U.S. Federal Reserve, driven by Friday's disappointing U.S. jobs data, have nudged the yen to a one-month high against the dollar, keeping pressure on the BOJ to act again soon.
Market players are already factoring in monetary easing at the BOJ's next meeting after the finance minister piled fresh pressure on the central bank, saying he expects it to take appropriate steps to support the economy this month.
Many in the central bank, still cautious about the outlook, are ready to pull the trigger on any signs the recovery is under threat. Some also fret that the renewed rises in the yen may hurt the economy and further delay an end to deflation. ($1 = 80.9100 yen)
(Editing by Joseph Radford and Robert Birsel)