GDP data gives some breathing space but not for long

TOKYO, May 17: The Bank of Japan is expected to hold off on boosting asset purchases when it reviews policy nextweek, preferring instead to save ammunition as Europe�s deepening debt crisis could warrant action in coming months tofend off damage to the fragile economy. BOJ officials, keeping a wary eye on developments in Europe,are ready to pull the trigger if fears of a Greek exit from the euro zone push the yen well above its record high and hit share prices enough to threaten Japan�s recovery prospects. Otherwise, the central bank hopes to stay put and assess theeffect of its monetary easing steps in February and April. Data on Thursday underscored expectations that policy willbe on hold. Japan�s economy rebounded from a lull in the firstquarter, adding to evidence of a fragile but steady recovery,giving BOJ some breathing space although not for long as the export outlook remains uncertain. �The economy is moving in line with the BOJ�s forecast, butthe bank must be watching financial markets closely as they remain jittery over Europe�s sovereign debt crisis,� said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute in Tokyo. �The timing of further monetary easing would depend more on(global) financial market movements than on the real economy.� The BOJ now regards asset purchases as its key monetary easing tool and is expected to hold its main policy rate at arange of zero to 0.1 percent. PAUSE BUT NOT FOR LONG The BOJ last month increased government bond purchases by 10trillion yen ($124 billion) under its asset-buying programme in a largely symbolic move to show its resolve of achieving its 1 percent inflation target. The move failed to sustainably weaken the yen or nudge upshare prices partly due to renewed market jitters over Europe�s debt crisis, keeping the BOJ under pressure for steps to prevent a strong yen from hurting the export-reliant economy. But central bank policymakers have signalled that they prefer to pause with the yen off last year�s record high and theeconomic outlook brightening. Behind their reluctance lies the fact that the BOJ, whichhas pledged to buy 29 trillion yen in Japanese government bonds(JGB) under the asset-buying fund by June 2013, is already struggling to force-feed funds to markets awash with cash. It failed to meet its target for bond buying on Wednesdayfor the first time since adopting the asset-buying programme in 2010, while safe-haven demand for JGBs sent the two-year bond yield to a seven-year low of 0.095 percent. Any further easing will likely take the form of further increases in JGB buying which may involve targeting bonds withlonger dates until maturity such as those with duration of up to five years, say sources familiar with the BOJ�s thinking. That is a step the bank does not want to take easily as itwould tie its hands for longer than it prefers, making an exit from ultra-loose policy more difficult, they say. While the BOJ will likely stress its readiness to ease againwhen necessary, it will time its actions carefully. Many market players expect the BOJ to next ease policy inJuly, when it conducts a quarterly review of its economic andprice projections that may show the slow progress the country is making in emerging from deflation. Even if it were to act, the BOJ is unlikely to cut the interest it pays on excess cash reserves parked with it to zerofrom 0.1 percent as doing so would not help push down already very low borrowing costs. ($1 = 80.3550 Japanese yen) (AGENCIES)