The Bank of Japan is examining holding an emergency meeting early next week to ease monetary policy as the strong yen threatens the country's fragile economic recovery, a source familiar with the matter said.
The most likely option is for the central bank to expand its fund-supply tool put in place in December last year, under which it offers up to 20 trillion yen ($234 billion) in three-month loans to banks at 0.1 percent, the source told Reuters.
Another possibility is for the BoJ to increase its outright government bond purchases from the current 21.6 trillion yen per year, although this is less likely due to strong opposition from some within the BoJ.
The date of the emergency meeting is yet to be decided and there is still a chance the BoJ may opt to wait until its regular policy-setting meeting on September 6-7 to loosen policy, the source familiar with the central bank's thinking said. The source declined to be named due to the sensitivity of the matter.
But an emergency meeting may be held as early as Tuesday, when BoJ Governor Masaaki Shirakawa is back in Tokyo after his visit to the United States for a central bankers' meeting in Jackson Hole, Wyoming.
Japanese policymakers have tried to talk down the yen and signalled their readiness to intervene in the currency market after the yen hit a 15-year high against the dollar on Tuesday, threatening to derail the economy's export-led recovery.
The BoJ has been considering easing policy and has been lining up its options, but had initially hoped to wait until the September rate review for clearer evidence of the damage the strong yen was inflicting on business sentiment.
But recent sharp yen gains and stock price falls, as well as mounting government pressure, alarmed some in the BoJ enough to ponder an immediate policy response. The government, which is expected to outline its economic stimulus measures next Tuesday, has heightened pressure on the central bank to do its part to support growth.
Prime Minister Naoto Kan said on Friday he hoped to meet Shirakawa as soon as possible after the governor's return from the United States, and request for a "flexible" monetary policy response to the strong yen.
The BoJ is expected to examine expanding the size of its fixed-rate fund supply programme to 30 trillion yen from the current 20 trillion yen, or extend the duration of cheap loans to banks to six months from three months.
Such a step could push down interbank lending rates and indirectly weaken the yen, although the impact would likely be limited and short-lived with money market rates already very low. The move would therefore be more of a token gesture to show that the central bank was doing what it could to support the economy.
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