The Bank of Japan is leaning toward easing monetary policy again next week, according to sources familiar with the central bank's thinking, with policy makers discussing additional steps that could come together with a further increase in its asset buying scheme.
The bank has been under renewed pressure to expand monetary stimulus at its Oct. 30 rate review when it is expected to cut its growth forecasts and push back the timing of hitting its 1 per cent inflation target.
On Monday, a slew of economic reports offered the latest evidence that the world's third-largest economy was struggling to sustain its momentum in the face of global headwinds and cooling demand and investment at home.
Exports suffered their sharpest decline since the aftermath of the March 2011 earthquake and business sentiment hurt by the territorial stand-off with China, Japan's top export market, hit its lowest since 2010.
Many central bankers are thus leaning toward action, the sources interviewed in the past several days said.
The most likely option is a further ¥10-trillion yen ($126-billion U.S.) increase to the BOJ's asset buying and lending program that now aims to pump ¥80-trillion in financial asset purchases and market operations by the end of next year.
The increase would mostly come in the form of government bond buying but may include a small increase in purchases of exchange-traded funds and real estate investment trusts, they said.
"The BOJ shouldn't hesitate if there are risks that Japan's recovery may be further delayed," said one source, who spoke on condition of anonymity due to the sensitivity of the matter.
But there is no consensus yet within the central bank on what the best step would be with some suggesting combining asset purchases with other steps.
One idea, suggested by some government officials, is to pledge to maintain the balance of the BOJ's asset holdings under the program beyond the end-2013 deadline for purchases, until 1 per cent inflation is in sight.
Such commitment in addition to the program's increase would go beyond what markets may have expected and assure them of the BOJ's determination to beat deflation, advocates of the move argue.
It could also effectively be seen as an open-ended pledge to keep buying financial assets in the Federal Reserve's fashion and would be a fitting response to lawmakers' criticism that the BOJ was not as decisive in its actions as its U.S. and European counterparts.
The BOJ has pledged to keep interest rates virtually at zero until 1 per cent inflation is in sight, but has not made clear what it will do with the asset-buying and loan program after the end-2013 deadline for purchases.
Another idea preferred by some within the BOJ is to expand a loan program targeting sectors with growth potential, which was created in 2010 and last expanded to ¥5.5-trillion.
Under the program, which is the BOJ's long-term effort to boost the economy's growth potential, the central bank offers cheap loans to commercial banks that lend to growth industries such as clean energy and nursing care.
Boosting the size of this program will send a message to the government that long-term efforts to nurture new industries, such as structural reforms, are equally important as easing monetary policy, advocates of this move say.
Aside from debating monetary policy, the BOJ is also set to cut its long-term economic and price forecasts at the Oct. 30 rate review and acknowledge that it will take several more years for Japan to achieve the bank's 1 per cent inflation target, sources have told Reuters.