UPDATE 2-Japan govt prods BOJ for action, but yen fall in doubt

Published: 15 Mar 2010 23:00:38 PST

* Finance, strategy ministers add to pressure for BOJ action

* BOJ leans towards easing policy at 2-day rate review

* Govt likely counting on BOJ easing to weaken yen

* Expectations for yen decline have tapered off (Recasts, adds quotes, details)

TOKYO, March 16 - Japanese cabinet ministers pressed the Bank of Japan to ease monetary policy in its two-day meeting that started on Tuesday, but the government may be disappointed by the outcome.

The central bank is expected to loosen policy but that might not have the market impact some analysts believe the government is hoping for. A boost to the economy would be welcome news for the government, whose opinion ratings are slipping ahead of upper house elections this year.

Analysts suspect the government is prodding the BOJ to ease its already ultra-loose policy to weaken the yen, hoping that will boost exports and offset deflation, but markets have had time to price in the expected outcome of the meeting.

The yen fell after the BOJ introduced a three-month funding operation at an emergency meeting in December, but this week's meeting lacks the ability to surprise unless the central bank produces a shock decision, dealers said.

"The BOJ thinks they have to come up with something, but what they may come up with will be quite limited ," said Shinichi Takasaka, manager of FX and financial products trading at Mitsubishi UFJ Trust & Banking Co.

"People have had such a long time to price this in. It won't be a real surprise like the emergency meeting last year." ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ What the BOJ might decide this week For more stories on Japan's economy click Q+A-Can the BOJ beat deflation? Q+A-Does Japan govt want to target inflation ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

The central bank is leaning towards easing monetary policy, sources said, following government calls to beat long-running deflation.

The most likely option is for the BOJ to expand the funding operation it launched in December. That offers banks up to 10 trillion yen ($110.5 billion) in three-month loans at the central bank policy rate of 0.1 percent.

After the emergency meeting in December, the yen pulled back from a 14-year high against the dollar of 84.82. It trended lower after the meeting to hit close to 94 per dollar in January, a five-month low.

Analysts say the government may be hoping for a similar drop this month to protect exporters' earnings and lift corporate sentiment before the fiscal year ends on March 31.

But, should the BOJ expand the funding operation as expected, yen declines are likely to be limited, traders said.

The government concern over the currency may be because of signs it could strengthen again.

It hit a three-month high early in March of close to 88 per dollar. It has since pulled back, to around 90 on Tuesday, but speculators have built long positions to signal expectations for the currency to rise.

Traders also said purchases of dollar/yen call options with strikes around 92 yen have slowed compared with last week, a sign expectations for the yen to fall back to that sort of level have faded.

Japanese Finance Minister Naoto Kan, who can influence monetary policy by sending a representative to sit in on BOJ meetings, said on Tuesday he was closely watching the outcome of the BOJ meeting this week.

Speaking to lawmakers in parliament, he also said markets should set currency rates but added that the government would need to act if moves were abnormal.

"The yen is relatively stable now but concerns remain that the euro's fall could affect the yen in the near future," Kan said. "I think that's a risk factor."

The euro has fallen more than 7 percent against the yen so far this year, part of a broad-based decline reflecting concerns about the debt woes of some euro-zone countries, including Greece.

Japan emerged from its longest recession in decades in the second quarter of last year following the global credit crunch. Exports are recovering, but domestic demand remains weak partly because the country has been in deflation for more than a year.

Spare industrial capacity means that capital spending is weak. A stronger economy could help government ratings, which have halved since it took power six months ago, putting at risk its ability to win a majority in upper house elections expected in July.

"We would like the BOJ to steer monetary policy to help boost production, corporate capital spending and personal consumption and help energise the nation," National Strategy Minister Yoshito Sengoku told a news conference after a cabinet meeting.

"The BOJ's monetary policy has a major impact on people's mindset," Sengoku said.

Kan has gradually increased the pressure on the BOJ in recent weeks by saying he wants deflation to end this year and that inflation of 1 percent is desirable. The BOJ sees deflation lasting for a few more years.

The government has prodded the BOJ to loosen policy even though it says the economy is steadily picking up because it wants to prevent a strong yen from derailing the export-driven recovery, analysts said. ($1=90.48 Yen)