BOJ likely to hold its monetary policy steady

TOKYO, Jan 17: The Bank of Japan (BOJ) is likely to leave monetary policy unchanged at its first Policy Board meeting of the year today, despite speculation of US pressure for a further credit easing, traders and analysts say. "Chances of an easing at this point are slim," said a senior bond trader at a Japanese city bank, reports Reuters.

"There is no need to take action immediately, since the yen's strength has been subdued recently and the economy has started to recover, even though the pace is slow."

The dollar traded above 105 yen throughout this week, compared with this year's low of around 101.40 yen marked on January 4.

Earlier this week, short-term Japanese government bonds (JGBs) firmed and the dollar found support against the yen on talk that the BOJ may face pressure at a Tokyo Group of Seven (G7) meeting on January 22 to take additional easing steps.

The bond market had been nervous that the BOJ might scrap its zero interest rate policy earlier than expected and begin pushing rates higher.

Speculation about a possible easing were sparked by a Jiji news agency report on Thursday quoting international monetary sources as saying the United States wanted such a step as a condition for helping Japan to weaken the yen.

Steps the BOJ could take to ease credit policy include increasing its buying operations of short-term government paper or JGBs, setting an inflation target, or establishing a target for levels of term money market rates such as TIBOR (Tokyo Interbank Offered Rate).

But economists said that, on the contrary, the next move by the central bank would most likely be a tightening, rather than a further easing of the zero-interest rate policy adopted last February.

They also said the BOJ would only take action when it is absolutely sure that Japan's economy has entered a self sustaining recovery, something that might not become clear until the end of 2000.

"The markets have been hoping for a tightening since the beginning of the year, but it's hard to see an actual rate rise this year, since it takes time to confirm the strength of an economic recovery," said Mamoru Yamazaki, senior economist at Paribas Capital Markets.

Currency dealers in Tokyo mostly dismissed the chances of any action by the BOJ at Monday's meeting.

But one dealer said the central bank could comment on the pace at which it has been bringing down the daily fund surplus in the money market after boosting supply to counter millennium bug concerns at the turn of the year.

The pace of fund-draining by the BOJ has been slower than expected, and some foreign players seemed to have taken that as an excuse to sell the yen, dealers and analysts said. But they said they did not think the slow pace reflected a change in the BOJ's monetary stance. "The mere fact that there still is a large amount of money in the market has a yen-negative effect, prompting speculators to unwind positions," said Taisuke Tanaka, forex strategist at Credit Suisse First Boston.

On Friday, the BOJ drained 1.5 trillion yen ($14.2 billion) from the money market, leaving a projected net surplus of 6.9 trilling yen. This compares with a surplus of 24 trillion yen at the beginning of the year.

Money traders said the BOJ is likely to bring down the daily fund surplus to the usual 1.0 trillion yen level over the next week or two.