*
BOJ seen making no major changes to YCC at April 27-28
meeting
*
No consensus within BOJ on how soon to phase out YCC
*
Doves prefer to wait, given past criticism of premature
hike
*
Others see scope for YCC tweak, July wage tally key
(Adds BOJ quarterly report on regional economy in 13th
paragraph)
By Leika Kihara
TOKYO, April 20 (Reuters) - The Bank of Japan is warming
to the idea of tweaking its controversial bond yield control
policy later this year, but will likely keep settings unchanged
at next week's meeting as it awaits more evidence of sustained
wage growth, sources say.
Kazuo Ueda chairs his first policy meeting since becoming
BOJ governor on April 27-28 and his appointment has heightened
expectations the bank will begin unwinding its ultra-loose
settings - the only question is when.
With global recession fears clouding the outlook, there is
no consensus within the BOJ on how soon it can end yield curve
control (YCC) - a policy that sets a short-term interest rate
target of -0.1% and a 0.5% cap on the 10-year bond yield.
However, five sources familiar with the BOJ's thinking say
the preferred approach, for now, is to stay the course, which
means the bank will make no major immediate changes to YCC and
its dovish policy guidance.
"Given looming overseas economic risks, it's appropriate to
maintain ultra-loose monetary policy now," said one of the
sources, a view echoed by two more sources.
But the nine-member board may engage in a more lively debate
on the fate of YCC at its June 15-16 and July 27-28 meetings.
Doves in the BOJ see the need to spend plenty of time to
ensure Japan's economy can weather external headwinds, and allow
firms to keep hiking wages next year - even if that meant
missing the opportunity to phase out stimulus in the current
recovery cycle, some of the sources say.
The BOJ is mindful of the dangers of taking any premature
steps that could be interpreted as a withdrawal of monetary
support, with previous rate hikes in 2000 and 2006 having drawn
strong political criticism as causing recession.
"The BOJ must avoid dampening public sentiment" by sending a
message that could be interpreted as an early approach of an
exit, one of the sources said, a view echoed by another source.
Others in the BOJ see scope to debate a tweak possibly in
the coming months, emboldened by big pay hikes offered by major
firms in annual spring wage talks, the sources say.
An intensifying labour shortage will likely keep companies
under pressure to hike wages, even if the economy slows,
according to those who see room for a near-term policy tweak.
"Japan's wage dynamics appear to be changing. It's possible
for 2% inflation to be sustainably met," one source said.
In a sign the BOJ was growing confident about the outlook
for wages, the bank said in a quarterly report on Thursday that
pay hikes were broadening in many parts of the country, even
among smaller firms.
Among key factors that could shape the debate is a final
tally of this year's wage talk outcomes, due out in early July,
that will show whether small firms hiked pay like their bigger
counterparts did, they say.
Market developments will also be crucial in determining the
timing of a policy tweak, they say.
As recent problems in the global banking sector make
safe-haven Japanese government bonds (JGB) more attractive, the
BOJ is under no immediate pressure to tweak YCC with the 10-year
yield now hovering around 0.465%, off its 0.5% cap.
But the central bank may consider modifying its 10-year
yield target or the allowance band set around it if renewed
upward pressure on JGB yields makes the cost of defending the
cap hard to ignore, the sources said.
With inflation exceeding 2%, markets have been rife with
speculation Ueda will phase out or end his predecessor's massive
stimulus that combines YCC with a big asset-buying programme.
Ueda has repeatedly said the BOJ will maintain ultra-loose
monetary policy, including YCC, as sustained achievement of 2%
inflation has yet to come into sight.
(Reporting by Leika Kihara; Additional reporting by Takahiko
Wada; Editing by Sam Holmes)
