Bank of Japan policy seen on hold as Shirakawa gives way to bolder leadership

The Bank of Japan is likely to keep monetary policy unchanged on Thursday, holding fire to wait for new leaders who are expected to usher in bolder measures to try to end nearly 20 years of mild deflation.

The two-day meeting that started on Wednesday is the last for Governor Masaaki Shirakawa and his two deputies. They leave on March 19 after a five-year term spent battling crises including the aftermath of Lehman Brothers' collapse in 2008 and the devastating March 2011 earthquake in Japan.

Investors expect the central bank to hold off announcing new stimulus measures until its next meeting on April 3-4, when Asian Development Bank President Haruhiko Kuroda, a vocal advocate of aggressive easing, is expected to be installed as the central bank's new governor.

He was nominated by Prime Minister Shinzo Abe to shake up the BOJ. The main opposition party, the Democratic Party of Japan, has indicated its support for Kuroda, suggesting he will be confirmed in the job.

Kuroda advocated in a confirmation hearing this week that buying longer-dated Japanese government bonds would help end deflation.

"The BOJ's new leadership is trying to generate inflation expectations, and the main tool will be aggressive buying of long-term JGBs," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.

"The new leadership views deflation as a monetary phenomenon. In contrast, the BOJ under Shirakawa focused on the real economy and whether or not there was demand for funds."

The BOJ may revise up its assessment of the economy on Thursday to say gains in factory output and signs of recovery in exports suggest it is bottoming out, sources familiar with the central bank's thinking said. That would be a slightly brighter view compared with last month when it said the economy "appears to have hit bottom".

Still, the upward revision is unlikely to relieve pressure on the BOJ's new management to come up with more innovative ways to end deflation.

The BOJ doubled its inflation target to 2 percent in January and made an open-ended pledge to buy assets from next year, under relentless pressure from Abe for bolder efforts to revive the economy. It stood pat in February.

Under Shirakawa, the BOJ has agreed to buy assets or make loans totaling 101 trillion yen ($1 trillion) by the end of this year, part of which includes buying government bonds with a maturity of up to three years.

Abe nominated Kuroda to head the BOJ and Kikuo Iwata, an advocate of unconventional monetary steps, as deputy governor. In winning an election in December, Abe pledged to overhaul monetary policy to revive the stagnant economy. The other nominated deputy governor, Hiroshi Nakaso, is a career central banker.

Abe's push for bolder monetary stimulus has helped weaken the yen to a near three-year low against the dollar, giving the export-reliant economy some relief and the BOJ some breathing space.

(Editing by Neil Fullick)