BOJ vows to act, but leaves few clues on next move

But Governor Masaaki Shirakawa offered few clues on what exactly the BOJ may do next and said monetary authorities could not control foreign exchange rates, triggering yen buying on speculation no aggressive easing was on the horizon.

“The dollar approached its 15-year low of 83.58 yen because of disappointment over Shirakawa's comments,” said Keiji Matsumoto, currency strategist at Nikko Cordial Securities.

“He doesn't seem to suggest additional easing. Unless the BOJ fully downgrades its economic assessment, it will not take new additional steps. The dollar/yen could fall to around 82 yen.”

Still, government pressure on the BOJ for more aggressive steps will likely grow in coming months with the economy expected to slow and as a leadership battle in the ruling party raises the chances of looser fiscal policy, analysts say.

Japanese government bonds tumbled in the last two weeks on worries of a possible shift away from Prime Minister Naoto Kan's efforts to rein in Japan's huge debt pile if he loses a Sept. 14 vote for the party's top spot to powerbroker Ichiro Ozawa.

Media surveys suggest Ozawa could win and investors are speculating he may be forced to issue more bonds to keep spending promises made when the party swept to power last year.

“So far, the market expectation is that Ozawa would pursue more fiscal expansion than Kan, and the market has to some extent priced in the possibility that Ozawa may become the next prime minister,” said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities.

“Fiscal expansion can easily be associated with a rise in government pressure on the BOJ to ease. And there are many market players who are looking at it that way.”

Others expect the BOJ to come under pressure no matter who wins the battle to head the Democratic Party of Japan.

“The BOJ has a tricky political road regardless of who leads the Democrats. Ozawa might pressure the BOJ, but if Kan stays and there's no big fiscal stimulus, this could also pressure the BOJ,” said Frederic Neumann, co-head of Asian economics at HSBC in Hong Kong.

No Aggressive Action?

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