BOJ set to keep policy steady, maintain price forecasts

By Leika Kihara

TOKYO (Reuters) - Japan's central bank is set to keep monetary policy steady on Friday and project inflation to hit its target next fiscal year, signalling that its next move could be to dial back its huge stimulus albeit at a much slower pace than its global peers.

Two new deputy governors - career central banker Masayoshi Amamiya and former academic Masazumi Wakatabe who is known as a vocal advocate of aggressive easing - make their debut at the two-day rate review ending on Friday.

While many analysts do not expect the newcomers to rock the boat at their debut rate review, some say Wakatabe could widen a rift in the board between advocates of big easing and those wary of the rising cost of prolonged easing.

The meeting also marks the fifth anniversary since Governor Haruhiko Kuroda, who was reappointed for another five-year term, deployed a massive asset-buying programme to break Japan out of deflation and accelerate inflation to his 2 percent goal.

While the board agrees on the need to keep policy easy for now, some have openly complained about the demerits of prolonged low rates in a sign of the challenge Kuroda faces in eradicating Japan's sticky deflationary mindset with a diminishing tool-kit.

With no policy change expected on Friday, markets are on the look-out for what Kuroda says on the effect rising U.S. Treasury yields could have on the Bank of Japan's policy capping Japanese long-term rates around zero percent.

"The BOJ is controlling Japanese yields well and I don't think that would change as a result of U.S. yield gains," said Mari Iwashita, chief market economist at Daiwa Securities.

"If U.S. rates continue to rise, that might put upward pressure on Japanese yields. But for the BOJ, that's far less trouble than a yen spike that puts it under pressure to ease further," she said.

The BOJ is widely expected to maintain a pledge to guide short-term interest rates at minus 0.1 percent and the 10-year bond yield around zero percent.

In a quarterly review of its projections, the BOJ is likely to keep unchanged the timeframe for hitting its price goal, now set at fiscal 2019, sources have told Reuters.

The nine-member board is also seen roughly maintaining its forecast made in January that inflation will hit 1.8 percent in fiscal 2019, and project inflation to stay near 2 percent the following year, they say.

Such optimistic estimates would reflect the BOJ's view that robust global demand will keep the economy on course for a solid recovery, allowing companies to boost spending and raise wages.

The BOJ's huge bond purchases have kept Japanese bond yields stable, even as benchmark 10-year U.S. Treasury yields climbed above 3 percent for the first time in four years.

That has caused U.S.-Japan yield differentials to widen in the dollar's favour, leaving the yen lower in a welcome boost to Japan's export-reliant economy.

Japanese policymakers generally favour a weak yen as it gives the country's exports a competitive advantage overseas. It also pushes up import costs and works to accelerate inflation.

Japan's economy expanded an annualised 1.6 percent in the October-December quarter, marking the eighth straight quarter of gains, on robust global demand and capital spending.

But core consumer inflation stood at 0.9 percent in March, well below the BOJ's target, as slow wage growth keeps consumers from increasing their spending.

(Reporting by Leika Kihara; Editing by Sam Holmes)