TOKYO - The Bank of Japan will ease monetary policy this week and consider adopting a 2 per cent inflation target no later than in January, sources said on Tuesday, responding to pressure from next Prime Minister Shinzo Abe for stronger efforts to beat deflation.
Turning up the heat, Abe made a rare, direct push for a higher inflation target when BOJ Governor Masaaki Shirakawa visited the headquarters of his Liberal Democratic Party (LDP).
"I told him that during my election campaign, I called for setting a policy accord with the BOJ and a 2 per cent inflation target," Abe told reporters. "The governor just listened," he said when asked how Shirakawa responded.
The LDP swept to power in Sunday's lower house election after campaigning for big fiscal spending to revive the economy and "unlimited" monetary easing to achieve higher inflation in a country mired in deflation for the past 15 years.
A day after the election, Abe called on the BOJ to boost its monetary stimulus at a two-day meeting that ends on Thursday and pressed it to adopt a 2 per cent inflation target, double its current price goal, as soon as next month.
Under pressure, the central bank will likely ease policy this week amid looming risks to Japan's economic outlook, sources familiar with its thinking have told Reuters, and may also start debating how to meet Abe's calls to set a higher price target.
Abe will form a new cabinet on Dec. 26 and is seen choosing Taro Aso as finance minister, Japanese media said, a former prime minister and veteral lawmaker expected to toe the party's line calling for aggressive easing and public works splurge.
That means the central bank will be under pressure to respond again at its policy-setting meeting on Jan. 21-22, when it is set to cut its economic forecast for the year ending in March 2013 due to the widening pain from slowing global growth.
"Abe's comments have really raised expectations for easing this week," said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting in Tokyo.
"I think the BOJ will deliver with increased purchases of government debt. Next year could also be a big year for monetary policy easing, because of the inflation target debate and a change in leadership at the BOJ."
The BOJ currently has a 1 per cent inflation target but has said this is a goal for the time being, and that it considers a range of zero to 2 per cent as long-term desirable price growth.
The central bank may thus opt to clarify that after the 1 per cent inflation is met, it will aim for 2 per cent inflation as a long-term policy goal, a way to meet demands from Abe for more aggressive monetary stimulus.
The BOJ and the government may issue a joint statement, similar to one crafted in October between the central bank and the outgoing government led by the Democratic Party, pledging to take measures to aim for 2 per cent inflation in the long run, the sources said.