The Bank of Japan is expected to refrain from easing monetary policy further on Tuesday, while stressing its readiness to act again in coming months if needed and extending a cheap loan line supporting growth industries.
There is a slim chance the board may debate loosening policy for the second month in a row, with some lawmakers calling for another big bang after last month's surprise easing, hoping it would boost stocks as companies close their books in March.
But the BOJ feels it has done enough for now with the yen well off record highs, stocks up and euro zone debt jitters receding, sources familiar with the central bank's thinking say.
For the time being, central bankers hope the loan scheme extension and reaffirmed easing bias will be enough to defuse political pressure for more action.
Expectations of additional near-term monetary stimulus have weighed on the yen, although the dominant market view is for the central bank to stand pat on monetary policy this month.
Having just eased last month, it would be hard to justify moving again. We expect the BOJ to ease again when the U.S. Federal Reserve boosts monetary stimulus, said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo.
The yen may briefly rise and stocks may fall if the BOJ refrains from easing, disappointing some investors who still see scope for action. But the move is seen short-lived as long as the BOJ reassures markets that further easing is on the horizon.
Bond markets are unlikely to react much unless the BOJ surprises by boosting government bond purchases or extends the maturity of bonds it buys under the asset-buying scheme.
BOJ, Fed balance sheets http://link.reuters.com/nyt65s
FED MOVE KEY
The central bank surprised markets last month by boosting asset purchases by 10 trillion yen ($121 billion), double the usual amount, and responded to politicians' calls for greater efforts to pull Japan out of deflation by setting a 1 percent inflation goal.
Even without politicians' nudging, the BOJ now seems more willing to act more frequently to support a budding recovery and achieve the price goal, making its actions less predictable.
But with output rising, exports seen improving and Greece having averted a disorderly default for now, the BOJ is seen saving up its ammunition for now, while stressing its commitment to further action if needed.
The BOJ is also seen extending a separate 3.5-trillion-yen loan scheme to encourage banks to fund prospective growth industries, created in June 2010 as a long-term effort to boost the economy's growth potential and beat deflation.
Analysts say the plan has limited policy significance given its scope, but is another way for the BOJ to demonstrate that it is doing all it can to invigorate the sluggish economy.
Of that amount, it is likely to extend by about a year a 500-billion-yen credit line for banks that lend against inventory and receivables as collateral, sources say, as only one-fifth of that amount has been tapped so far.
Many analysts expect the BOJ to ease policy further in April, if not this month, by topping up its 65-trillion yen asset buying and lending scheme.
But achieving the current target is already becoming difficult. The BOJ needs to buy 20 trillion yen in assets by the end of this year to meet the new 30 trillion-yen target, no easy task as some of its auctions already fail to draw enough bids in a sign it is force-feeding more cash than markets can swallow.
That means the BOJ may need to extend the maturity of bonds it buys under the programme to three-year and five-year bonds if it were to boost the scheme again.
Another possibility is that the central bank may raise the ceiling from current 35 trillion yen on the amount of securities it accepts as collateral for loans. Credit Suisse believes it could even do so on Tuesday.
Fed policy remains key to when and how much the BOJ will next ease. Recent signs of improvement in U.S. job markets have led economists to scale back expectations of stimulus by the U.S. central bank, which also holds a policy meeting on Tuesday.
($1 = 82.3550 Japanese yen)
(Reporting by Leika Kihara; Editing by Tomasz Janowski and Joseph Radford)