Bank of Japan Governor Masaaki Shirakawa reiterated the central bank's resolve to maintain its ultra-easy monetary policy following Friday's Group of Seven agreement to join in a rare coordinated intervention to restrain soaring yen.
The central bank is also determined to flood markets with more cash than banks can swallow to keep market rates low and will refrain from draining funds injected through Tokyo's yen-selling intervention, sources familiar with the matter told Reuters.
But while the BOJ stands ready to ease policy further, it will carefully examine the impact last Friday's deadly 9.0 magnitude earthquake and a subsequent yen surge could have on Japan's economy in deciding the timing of its next move.
The Bank of Japan will promote powerful monetary easing and continue providing ample liquidity to ensure market stability, Shirakawa told reporters after Friday's G7 announcement.
Some analysts interpreted Shirakawa's remark as signaling the possibility of an imminent monetary easing.
But the phrase powerful monetary easing is not new and has been used by the BOJ ever since it created last October a pool of funds to buy assets ranging from government bonds to private debt. It therefore does not signal any shift in policy or the chance of a strengthening of monetary easing, one of the sources said.
I don't think Shirakawa's comment signaled the chance of more BOJ easing. It just means the BOJ will maintain its current ultra-loose policy stance and keep short-term borrowing costs from rising by flooding markets with cash, said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
Having said that, I won't rule out the chance of further monetary easing in the future. When the government compiles an extra budget for disaster relief, the BOJ may buy more government bonds or expand its asset buying program again.
The BOJ is far from finished easing monetary policy and may act again as soon as next month if the damage from the quake threatens Japan's return to growth after is economy contracted in the final quarter of 2010, sources familiar with the BOJ's thinking said.
The most likely option is to further boost its asset buying pool, which the central bank just doubled to 10 trillion yen on Monday, though the type of assets targeted for an increase would vary and depend on which markets would be most volatile at the time.
For now, however, the BOJ's priority is to continue pumping more money into the banking system through its market operations to ensure that the market continues to function as normal, the sources said.
The BOJ offered another 4 trillion yen in the money market on Friday in its fifth day of same-day operations, although it drew bids of just 1.68 trillion yen for a first 3 trillion batch in a sign that so far there were no strains in the banking system.
The operations have driven current account deposits financial institutions hold with the BOJ to around 35 trillion yen, the highest since February 2006 -- the period when the central bank was pursuing its quantitative easing policy that targeted the amount of funds in the financial system.
Last October, the central bank cut interest rates effectively to zero, pledged to keep them there until the end of deflation was in sight and set up a 5 trillion yen pool of funds to buy various assets to help the world's third-largest economy fully recover from the 2008-2009 global economic crisis.
(Additional reporting by Rie Ishiguro; Editing by Tomasz Janowski)