By Leika Kihara
TOKYO, Oct 29 (Reuters) - The Bank of Japan is set to maintain its massive stimulus programme on Thursday and vow to take further action if the economic fallout from the coronavirus shock threatens a return to deflation.
But the rising cost of prolonged easing and a dearth of policy tools may mean there is not much the BOJ can do beyond rolling over its crisis-response package, or count on the government to unveil another spending package to re-ignite growth, analysts say.
Given the need to keep in place some restraints to economic activity to prevent the spread of the virus, the BOJ is not in a position now to push prices higher with further easing, said Naoya Oshikubo, senior economist at SuMi TRUST.
"As a result, the key policy drivers under Prime Minister (Yoshihide) Suga will be fiscal policy, deregulation and growth strategies, leaving monetary policy on the sidelines," he said.
In a quarterly review of its projections, the BOJ is seen cutting this year's growth and price forecasts as the pandemic hits domestic demand, sources told Reuters.
But the central bank is set to leave its yield targets unchanged at the two-day rate review concluding on Thursday, on the view the economy is headed for a moderate recovery.
The BOJ is also seen making no changes to a package of steps aimed at easing corporate funding strains, which has become its primary tool to deal with the pandemic-striken economy.
At his post-meeting briefing, BOJ Governor Haruhiko Kuroda is expected to reiterate the bank's resolve to ease further if the pandemic derails a fragile recovery.
With the economic scars from COVID-19 seen taking years to heal, the BOJ is set to extend the March deadline for its crisis-response package. A decision is expected either in December or January.
For now, the board is likely to focus its debate on whether a recent rebound in exports and output can offset weaknesses in consumption and capital expenditure.
A pick-up in domestic demand is critical for lifting Japan's economy from its biggest postwar slump, and avoid slipping back into deflation.
Analysts expect core consumer prices, which declined for two straight months in September, to keep dropping due partly the impact of a government discount campaign for domestic travel.
While many BOJ officials say they will look past such temporary factors, some worry the weakness in prices could stoke fears of deflation and prod households to put off spending.
After years of heavy money printing, however, the BOJ has few tools left to counter such risks. That puts the onus on the government, which is facing growing political calls to compile another spending package, analysts say.
(Reporting by Leika Kihara Editing by Shri Navaratnam)
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