The Bank of Japan has put monetary policy on hold and found backing for its wait-and-see stance from advisors to Prime Minister Shinzo Abe, who worry more easing could send the yen to damagingly low levels, according to officials in the administration and central bank.
This newfound caution from some of the same Abe advisors who urged the BOJ to launch its massive stimulus in 2013, means Japan is set to be an outlier at a time when central banks from Canada to the euro zone to Singapore have shocked markets by easing policy in recent days.
Concerns about the yen, along with a belief among central bank officials - including Governor Haruhiko Kuroda - that coming wage increases will support higher prices, suggest the BOJ could hold policy steady until October, months after many economists expect it to be eased.
"The environment under which the BOJ is working to hit 2 percent inflation has changed dramatically. We need to take that into account," Economics Minister Akira Amari said on Tuesday.
The BOJ stunned markets by expanding its stimulus in October last year to try to prevent slumping oil prices, and a subsequent slowdown in price growth, from causing the central bank to miss its 2 percent inflation target.
But since then, oil prices have fallen by another 50 percent. Core inflation fell for a fifth month to hit 0.5 percent in December, data showed on Friday, stoking expectations the BOJ could face pressure to ease again.
But Kozo Yamamoto, a leading expert on monetary policy in Abe's ruling Liberal Democratic Party, said last week that he expected the BOJ could even hold policy steady for the remainder of this year in the absence of some external shock.
"What more can the BOJ do? I think the central bank can hold off on action and take a wait-and-see stance for the time being," Yamamoto told Reuters in an interview last week.
YEN WORRIES
The BOJ's stimulus, dubbed "quantitative and qualitative easing," or QQE, has been a mainstay of Abe's pro-growth policies known as Abenomics, an attempt to push Japan's economy out of the slow growth and deflation that characterized the 15 years before Abe took office.
Privately, government officials in the Abe administration said the stand-back and wait comments by Amari and Yamamoto reflect a caution that any further BOJ action could drive the yen lower. That, in turn, could offset the gains to consumer purchasing power from lower prices for imported oil, they said.
"Further monetary easing is scary because if the yen weakens more, that could cause problems," one official said.
The dollar has risen 9 percent against the yen since early October and almost 30 percent since Abe was elected in December 2012. The weak currency has been a boon to exporters like Toyota Motor but has hurt companies like discount carrier Skymark Airlines, which cited higher costs for its dollar-based aircraft leases as a reason for its bankruptcy filing this week.
Kuroda has essentially watered down his two-year time frame for hitting the BOJ's inflation target, admitting earlier this month that Japan may not see inflation hit 2 percent until fiscal 2016.
Many BOJ officials prefer to stand pat for now on hopes that companies will raise base salaries in trade union wage talks in March. They also expect the economy to rebound solidly from the recession, helping offset the deflationary pressure of falling oil prices.
"I think inflation rates may even fall in the short term. But we expect to see price increases accelerating in the second half of next fiscal year," Kuroda told parliament on Thursday.
By October, the statistical impact of oil prices compared to the prior year would have partially washed out of the inflation data. At that time, the central bank will also be issuing new quarterly forecasts for the economy and prices.
Some people close to the BOJ's policymaking said they believed it could stand pat until then.
"By sharply cutting its inflation forecast this month, the BOJ bought itself about a year's worth of time," said a former BOJ executive who remains in close contact with incumbent officials.
The BOJ held policy steady in January even as oil prices continued to fall and forced it to cut its core consumer inflation forecast for next fiscal year to 1 percent.
In the latest survey of economists by the Japan Center for Economic Research, 13 of 25 economists who expect a further BOJ easing see it happening in April or July. The survey, the broadest of its kind, is tracked as a benchmark for market expectations on Japan's monetary policy.
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