Listen to article

The Bank of Japan may raise its economic assessment and keep policy unchanged tomorrow after its Tankan business survey showed the export-driven recovery is gaining momentum, Bloomberg said on Tuesday.

Governor Masaaki Shirakawa and his colleagues will leave the benchmark interest rate at 0.1 per cent, according to all 21 economists surveyed by Bloomberg News. The board may present a more upbeat view of the economy in a statement to be released after the meeting, three people familiar with the matter said.

Signs of a sustained recovery even amid deflation may allow Shirakawa to put off any decision to add to liquidity injections until the following policy meeting at the end of the month. Prime Minister Yukio Hatoyama's government will probably intensify pressure on the bank to spur the economy ahead of a July election, said economics professor Akio Makabe.

'Even though the BOJ doubled its lending program in March, the government probably sees it as insufficient,' said Makabe of Shinshu University in Matsumoto, central Japan. 'The bank has no choice but to keep implementing what it can in bits and pieces and signal its cooperation with the government.'

The central bank last month doubled the credit program, which offers commercial lenders three-month loans at 0.1 per cent, to 20 trillion yen ($212bn) after Finance Minister Naoto Kan led calls for it to do more to spur prices.

'Cooperation between the government and the central bank is going well as we share the same goal and are both making efforts' to combat deflation, Kan said at a news conference in Tokyo on Tuesday. When asked about Shirakawa's performance since becoming governor two years ago, Kan said he is 'doing a very good job.' Kan also said he respects the bank's independence.

Some 100 legislators of the ruling Democratic Party of Japan last week formed a group to urge the central bank to act on deflation, which can erode corporate earnings and make debts harder to pay off.

The bank's March decision 'has inculcated among investors the suspicion that the BOJ is weak to political pressure,' said Naka Matsuzawa, chief investment strategist at Nomura Securities in Tokyo.

'The perception may impede the bank's policy management from now on.'

Two board members, Miyako Suda and Tadao Noda, opposed last month's credit expansion. Ryuzo Miyao, an economics professor at Kobe University, became the eighth member on March 26 and attends his first policy meeting this week.

The policy announcement is expected early afternoon tomorrow in Tokyo, and Shirakawa is scheduled to brief the press at 3:30 p.m.

The Nikkei 225 Stock Average has gained 12 per cent since the end of February on speculation the economy's revival and a weaker yen will spur corporate earnings. The gauge slipped 0.2 per cent to 11,322.49 at 9:34 a.m. in Tokyo. The yen traded at 94.26 per dollar, about 11 percent cheaper than the 14-year high of 84.83 reached last November.

The Tankan survey showed large manufacturers became the least pessimistic since September 2008, the month when the collapse of Lehman Brothers Holdings Inc. intensified the world financial crisis. Big firms said they expect profit to grow and reported lower excesses of production capacity and workers.

Renesas Electronics Corp. forecast revenue may rise about 10 percent in its first year of operations, thanks to demand from China and chips used in factory equipment, President Yasushi Akao said last week.

'Given robust expansions in China and elsewhere in Asia, the Japanese economy will probably avoid slipping into a lull' even after policy stimulus effects fade, said Ryutaro Kono, chief economist at BNP Paribas in Tokyo. He predicts growth may have accelerated to an annual 5.1 per cent pace last quarter from 3.8 percent in the final three months of 2009.

The BOJ may stop saying the expansion will 'remain moderate' in its monthly evaluation because demand from emerging markets is spurring exports and production, one of the people familiar with the matter said. Shirakawa said last month the economy was recovering slightly better than he had expected.

The revival may also prompt BOJ officials to predict price changes will approach zero next fiscal year when they update projections on April 30, the person said. Board members currently forecast a 0.2 percent decline in consumer prices excluding fresh food next fiscal year, following a 0.5 per cent drop in the period ending March 2011.

Even so, any upgrade to the price assessment may not be big enough to reverse the bank's policy stance. The median of the board members see inflation to be stable at 1 per cent, a rate Kan wants the central bank to adopt as a formal target.

Rising global demand for commodities and the weaker yen have made imported raw materials more expensive, squeezing margins for companies that are struggling to pass on costs to consumers at home.

The bank will have two possible occasions to add to policy easing before the July upper-house election, said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. The first is at the April 30 meeting, and the second is around June, when the government plans to unveil plans to restore fiscal health, he said.

'Japan lives with chronic deflation, on the back of a shrinking population,' Ueno said. 'Mid-term price expectations are stable so far, but the risk remains to the downside.'