* Increasing ETF buying emerging as strong option – sources
* BOJ focus for now on stabilising markets, lifting mood
* More thorough analysis of economy will come in April
* BOJ next meets for rate review March 18-19 (Adds details on BOJ’s policy options, Japan’s economy)
By Leika Kihara and Takahiko Wada
TOKYO, March 11 (Reuters) – The Bank of Japan is expected to ease monetary policy next week in an attempt to limit the impact of the coronavirus outbreak and recent market volatility on business sentiment, sources familiar with the central bank’s thinking told Reuters.
While there is no consensus yet on what steps the BOJ should take, increasing the size of its exchange-traded fund (ETF) purchases is among the most likely options, the sources said.
“It’s impossible to fight the coronavirus with monetary policy. But it can play a role in breeding confidence among the public, which the BOJ may need to do next week,” one source said, on condition of anonymity.
“The BOJ must avoid the market volatility from triggering a downward spiral in the economy via souring sentiment,” another source said, a view echoed by two other sources.
The plan is preliminary and subject to change as the BOJ’s nine-member board has yet to engage in fully-fledged talks on the preferred next step, the sources said.
The BOJ has been under pressure to loosen monetary policy at its March 18-19 rate review as slumping stock markets, a spike in the yen and jitters over the epidemic threaten to curtail corporate investment and derail a fragile economic recovery.
Pledging to buy ETFs at a faster pace would help put a floor under the stock market and prevent business sentiment from worsening too much as a result of slumping prices, the sources said.
“It’s among options if purchases approach the 6 trillion yen the BOJ pledges to buy annually,” a third source said of the possibility of increasing its ETF buying.
Any such monetary step will be accompanied by an expected decision by the BOJ to help ease financial strains on smaller firms ahead of the March-end of the fiscal year.
Deepening negative interest rates – another option in the BOJ’s dwindling tool-kit – is considered less likely as ultra-low rates are already hurting financial institutions, the sources said.
Under a policy dubbed yield curve control, the BOJ guides short-term interest rates at -0.1% and the 10-year government bond yield at around zero. It also buys risky assets such as ETFs to funnel money to the economy.
The BOJ occasionally steps into the market to buy ETFs under a pledge to purchase roughly 6 trillion yen annually.
Some analysts say the central bank may reach that target in several months if it keeps buying at the current pace, which was ramped up this month to cope with the market rout.
Japan’s economy contracted in October-December and is seen shrinking again in the current quarter, as companies suffer from slumping inbound tourism and event cancellations caused by the health crisis.
Many in the BOJ see the coronavirus fallout as transitory and expect Japan’s economy to rebound in the latter half of this year. But that prediction is based on an assumption that the coronavirus is contained in the next few months.
A recent survey showed service-sector business confidence in February sinking to its lowest level since April 2011, a month after a devastating earthquake and tsunami hit Japan.
Given uncertainty on how long it will take to contain the coronavirus outbreak, the BOJ will wait until its meeting on April 27-28 to conduct a more thorough assessment on the hit to economic and price growth from the epidemic.
That will allow policymaker to scrutinise data such as the BOJ’s quarterly “tankan” business sentiment survey which is due on April 1.
For now, the BOJ will focus on stabilising markets and dealing with the immediate financial hit to firms from the outbreak, the sources said. (Reporting by Leika Kihara and Takahiko Wada; Editing by Alexander Smith)
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