(Reuters) – The Bank of Japan is likely to discuss next week what Europe’s debt troubles mean for its own fragile economic recovery and is expected to conclude that the crisis will not have a big impact, allowing it to keep monetary policy unchanged.
The central bank is also expected to announce details of a new loan scheme aimed at redirecting money to industries with growth potential, such as the size and length of loans to banks.
It is widely expected to keep its policy rate at 0.1 percent.
Here are possible outcomes:
UNVEILS DETAILS OF LOAN PLAN, NO MONETARY EASING
The BOJ last month outlined a program under which it offers one-year loans at 0.1 percent interest to banks that will fund projects in industries with growth potential. More details of the scheme are likely to be released after the meeting.
The BOJ has said the scheme is a long-term approach to beating deflation and is not monetary policy. The bank therefore will not set a target on the total amount of loans to be extended but instead set a cap of 1 trillion or 2 trillion yen ($11 billion or $22 billion), so that the cash does not directly affect interest rates.
The BOJ will allow the loans to be rolled over several times so private banks can borrow for several years at the overnight call rate. It hopes to start lending from July or August at the latest.
Market reaction: Money market rates may briefly fall if the size of the loans to be extended is bigger than expected.
NO ANNOUNCEMENT OF LOAN SCHEME DETAILS
The BOJ has been asking private banks to see what kind of loan scheme best suits their needs. If the requests require big changes to the scheme, full details of it may not make it in time for the rate review.
Even if the details are worked out in time, a decision may be delayed until July if the board cannot reach a consensus.
The sticking point is the total size of loans and how to define areas with “growth potential.” Too broad a definition could put the BOJ’s balance sheet at risk, while making it too narrow would make banks reluctant to use the scheme.
Some BOJ officials, including board member Miyako Suda, have stressed that the scheme needs to be designed in a way that does not expose the BOJ to credit risk.
Market reaction: A delay in announcement is unlikely to affect markets because traders expect the BOJ to come up with full details by July.
EASES POLICY FURTHER
Probability: Highly unlikely
The BOJ is increasingly alarmed over debt problems in Europe, which have hurt stocks and pushed up the yen against the euro to the dismay of some Japanese exporters.
But it does not view the fallout as big enough to alter its forecast that solid exports to Asia will keep Japan on course for a moderate recovery.
The BOJ has not ruled out easing policy further in case of market turmoil. But with rates already near zero, the BOJ is likely to save the few policy options it has left for later.
Its options include to expand a fund supply operation launched in December and expanded once in March.
Market reaction: A surprise move would push down money market rates and the short end of the bond yield curve, triggering yen selling.
(Editing by Jan Dahinten)