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By Leika Kihara
TOKYO, Aug 30 (Reuters) - The Bank of Japan will hold an
emergency meeting on Monday to ease monetary policy in the face
of strong government pressure as the yen's strength threatens a
fragile economic recovery.
The most likely option is to expand a cheap fixed-rate loan
programme for banks, sources familiar with the BOJ's thinking
said, although any such move is already widely expected and
unlikely to weaken the yen for long.
Sources had told Reuters that the BOJ was expected to hold an
extra meeting early in the week to loosen policy as the strong
yen threatens Japan's fragile economic recovery.
The early return by BOJ Governor Masaaki Shirakawa from his
trip to the United States made an emergency BOJ meeting on Monday
almost a certainty as of Sunday.
The central bank's nine-member board will meet from 9:00 a.m.
(0000 GMT). Governor Shirakawa will hold a news conference at
2:30 p.m. (0530 GMT), the BOJ said.
Japanese policymakers have tried to talk down the yen and
signalled the chance of intervening in the market after the
Japanese currency hit a fresh 15-year high against the dollar
The government has also heightened pressure on the BOJ to do
its part to support growth and help curb rises in the yen, which
hurt exports and may delay Japan's exit from deflation.
Prime Minister Naoto Kan said last week that he wanted to
meet Shirakawa as soon as he returns from his trip to the United
States, and request a "flexible" monetary policy response to the
Shirakawa will meet with Kan on Monday to discuss economic
and market developments, public broadcaster NHK said.
The BOJ likely aimed to hold the emergency meeting before the
two meet to avoid giving markets the impression it yielded to
government pressure, analysts said.
LINING UP OPTIONS
Japan will likely need to intervene alone if it were to step
in to curb yen gains, as its Group of Seven counterparts, happy
with the benefits to exports from their weak currencies, are in
no mood for coordinated intervention.
Solo currency intervention, however, will not have much
effect in weakening the yen unless joined by aggressive monetary
easing by the BOJ, traders say.
The BOJ has been considering easing policy and lining up its
options, but had wanted to wait until its next regular rate
review on Sept. 6-7 for clearer evidence of the harm the yen's
rise was inflicting on business sentiment.
There is a slim possibility the BOJ will opt for aggressive
measures, such as increasing government bond purchases or cutting
its overnight rate call target, as some government officials are
already complaining that minor tweaks to the fund supply scheme
would not be enough.
But the BOJ will likely save such bold steps for when Japan's
economy slows further later this year on weakening export growth.
The BOJ set up the cheap funding scheme, which offers up to
20 trillion yen ($234.3 billion) in three-month loans at 0.1
percent, in December, at an emergency meeting held a day before
Shirakawa met with then Prime Minister Yukio Hatoyama. That
failed to boost bank lending but helped to push the yen further
away from a November high.
The central bank is expected to either boost the size of
money on offer to 30 trillion yen, or extend the duration of
fixed-rate loans to six 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.
In a sign markets are awash with more funds than banks can
swallow, the fund supply operation now draws bids nearly five
times the amount offered at each operation, down from about seven
times in the previous month.
Expanding the fund supply tool would therefore be more of a
token gesture to show that the central bank was doing what it
could to support the economy.
With short-term rates already very low, investors are pushing
down the longer end of the yield curve on expectations of further
monetary easing, causing it to flatten.
While the yield curve steepened on Friday as banks sold
superlong bonds to take profit, the curve is still at its
flattest in months, partly because of deep scepticism that Tokyo
has any tools left to fight deflation.
The BOJ last eased monetary policy in March, when it doubled
the size of the fixed-rate fund supply tool to 20 trillion yen.
(Editing by Edmund Klamann)