(Bloomberg) -- The Bank of Japan is widely expected to leave its stimulus unchanged Thursday within hours of the Federal Reserve’s policy decision though speculation is growing that Fed moves could nudge the BOJ to take action later this year.

While all of 50 economists surveyed by Bloomberg forecast no change in BOJ policy at the end of this week’s meeting, the increasing likelihood of interest rate cuts by the Fed has prompted a rethink among BOJ watchers. For the first time in more than two and a half years, a majority of them now see further easing as the BOJ’s most likely next step.

The main focus of among BOJ watchers this week will be any signs of urgency on additional action from Governor Haruhiko Kuroda and his board. The central bank would prefer not to expand stimulus, given its low ammunition and the accumulating side effects of policy. Unlike the Fed or the European Central Bank, the BOJ is facing the risk of a global economic downturn without having taken any clear steps toward policy normalization.

Still, Kuroda will need to continue showing a readiness to act if necessary to keep the threat of a stronger yen at bay as uncertainty over the global outlook continues.

“The BOJ wants to sit tight for now as any action by the Fed will itself depend on economic conditions,” said Daiju Aoki, an analyst at UBS CIO Wealth Management. “To avoid additional gains in the yen, the BOJ will need to show a dovish stance by emphasizing economic and political risks.”

Rate cuts by the Fed could put pressure on the yen to gain, squeezing corporate profits and wage growth while lowering import prices, generating deflationary pressure in Japan’s economy. While the Fed has room to cut rates several times before it hits zero, the BOJ’s short-term interest rate is already -0.1%.

The board meeting typically ends around noon followed by Kuroda’s press briefing at 3:30 p.m.

What Bloomberg’s Economists Say

“We’ll watch for any changes in nuance when Governor Haruhiko Kuroda gives his take on the growth and inflation outlook--and the pros and cons of extra stimulus as headwinds pick up.”

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What to look for

  • Kuroda told Bloomberg last week that no policy action is needed now, though he added that the BOJ still has room for big stimulus. Any indication that the BOJ is getting closer to considering extra easing would likely weaken the yen and lift stock markets.
  • The governor is likely to cite the need to see more data before taking a gloomier view of the economy. The BOJ will also want to assess the full impact of Fed decisions, the result of a U.S.-China talks expected later this month at a Group of 20 summit in Japan and the result of an upper house election in July.
  • Kuroda is likely to be questioned about the need to steepen the yield curve and whether the BOJ is able to stop yields falling further. Japan’s 10-year government bond yield dropped to -0.14% on Tuesday, the lowest level since August 2016. That’s before the bank launched its framework for shaping the array of yields.
  • The governor is also likely to be asked how the BOJ might mitigate the side effects of further action should it take place.
  • Economists also think the BOJ’s inflation forecast made in April for the next fiscal year is too optimistic. Any remarks on the price outlook will be closely scrutinized. The BOJ sees inflation at 1.4% in the year starting April 2020, sharply higher than the 0.8% seen by private economists.

Policy Recap

  • Pledge to keep interest rates extremely low until at least around spring of 2020.
  • A rate of -0.1% on some reserves financial institutions keep at the central bank.
  • Yield target of about zero% for 10-year Japanese government bonds, with a trading range of about 0.2 percentage point on either side of the mark.
  • A target of increasing JGB holdings by about 80 trillion yen ($737 billion) a year is now secondary to controlling interest rates. The actual pace of purchases has fallen to well below half that rate.
  • A guideline to increase holdings of exchange-traded funds by 6 trillion yen a year. Actual purchases vary widely from month to month, depending on market conditions.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Paul Jackson, Henry Hoenig

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