The Bank of Japan will probably stand pat on policy on Wednesday but may debate more easing if it feels that global recession fears and volatile markets pose such a threat to the country's economic recovery that it warrants additional monetary stimulus.
Switzerland's bold move to set a ceiling for the soaring franc's exchange rate against the euro adds pressure on the Japanese central bank to prevent safe-haven inflows from driving up the yen with a further loosening of monetary policy.
While the Swiss move is unlikely to serve as a trigger on its own, BOJ policymakers have plenty of other worries such as the euro zone debt crisis and the global stock market rout, which sent the Nikkei average to a 2-1/2-year low on Tuesday.
The central bank may decide to act now if the board feels that risks to growth have heightened sharply from last month, although it is still more likely to wait until October for more evidence of damage to the economy.
"There are signs of weakness in exports so Japan's economic recovery may lose momentum in the fourth quarter," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
"But it's also true that the BOJ expanded monetary stimulus pretty much and doing more will do little for the economy. In any case, yen moves will remain key on when it will ease next."
Japan stumbled into recession after the massive earthquake and tsunami in March, but a rapid recovery in output had led the BOJ and market analysts to forecast that the world's third-largest economy will resume moderate growth later this year.
Many in the BOJ are wary of acting now as they feel they have already pre-empted risks, such as the yen's strength and slowing global demand, by loosening policy last month with an increase in asset purchases.
With the yen below record high against the dollar set last month, the BOJ prefers to hold off on loosening policy to save its depleted options for when the economy faces further trouble.
Still, it will probably signal its readiness to act later if recovery looks at risk and some central bankers already have doubts whether it will materialise given slowing factory output at home and gloomy outlook for the world economy.
In addition, the Swiss move put the BOJ in a tight spot. While the yen has held back for now, many market players expect the currency to resume its rally if some safe-haven inflows shift from the franc into the yen.
Any monetary easing would probably come in the form of an increase in the central bank's asset buying, which was topped up by another 5 trillion yen just last month, with most of the increase in government bonds and exchange-traded funds.
Action on Wednesday would be a surprise to markets in terms of timing, but traders say the impact would be short-lived unless the central bank boosted asset purchases by at least 10 trillion yen or stepped up long-term government bond buying.
Motohisa Furukawa, economics minister in the new cabinet formed last week, said he wanted the central bank to consider easing policy further.
One of two government representatives who attend the central bank's rate reviews is from the Cabinet Office, which Furukawa heads, and so may request further easing at the meeting. The representatives cannot vote on rate decisions, but can express their views and request a delay in the board's vote.
Still, the BOJ has plenty of reasons to save up ammunition for later. The European Central Bank may signal halting its rate tightening cycle on Thursday and the Federal Reserve is seen adding monetary stimulus on Sept. 20-21, which could again weaken the dollar.
There is also no guarantee that easing now will stave off political pressure for more action in October, when debate on how to pay for post-quake reconstruction starts in earnest under new premier Yoshihiko Noda.
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