BOJ seen holding fire as trade war fears ease

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    By Leika Kihara

    TOKYO- The Bank of Japan is set to keep monetary policy steady next week, as receding fears of a disorderly Brexit and signs of progress in US-China trade talks take some pressure off the central bank to use its dwindling ammunition to underpin growth.

    BOJ officials also expect the government’s fiscal spending package to offer a significant boost to the economy when public works projects roll out next year, said sources familiar with the central bank’s thinking.

    A decision to stand pat would put the Japanese central bank in line with the US Federal Reserve and the European Central Bank, which have both signaled that monetary policy will be in a holding pattern for the time being.

    But the receding overseas risks offer little respite for the BOJ, as a recent slew of weak domestic data cast doubt over its view that robust domestic demand will continue to offset weak exports and help sustain Japan’s recovery.

    The BOJ may offer a bleaker view on factory output than in October and warn of the temporary impact October’s sales tax hike may have on domestic demand, the sources said.

    But it is likely to roughly maintain its view that Japan’s economy continues to expand moderately as a trend, blaming the weakness in output on typhoons that disrupted deliveries of supplies, they said.

    “There are some signs of weakness in Japan’s economy, but overseas risks are receding somewhat and capital expenditure remains firm,” said one of the sources.

    “There’s no major change to the BOJ’s baseline scenario of a moderate economic expansion,” the source said on condition of anonymity, a view echoed by two other sources.

    In its assessment made in October, the BOJ said factory output is flat and domestic demand is increasing.

    BOJ Deputy Governor Masayoshi Amamiya used a more cautious language on Thursday, saying that output was “weak” and domestic demand could temporarily soften. – Reuters