TOKYO (Kyodo) -- The Bank of Japan began a two-day meeting on Monday amid speculation that it will tweak policy to improve the sustainability of its monetary stimulus.
The central bank's nine-member Policy Board is expected to cut its inflation forecasts for the three years through fiscal 2020, prolonging its fight to achieve its 2 percent inflation goal.
But after more than five years of aggressive monetary easing, there have been mounting concerns over negative side effects such as ultralow interest rates eating into commercial banks' profits and the BOJ's massive asset purchases distorting the market.
Market participants are closely watching the meeting for policy changes that would alleviate those unwanted aspects.
The BOJ currently pledges to guide long-term interest rates to around zero percent, but has effectively allowed the yield on the benchmark 10-year government bond to rise as high as 0.1 percent. One of the changes could mean letting the yield drift even higher.
On Monday, speculation about such a policy change sent the 10-year government bond yield briefly to an 18-month high of 0.11 percent. The central bank was forced to carry out an intervention, called a fixed-rate buying operation, for an unprecedented third time this month in order to curb the yield rise.
Those with knowledge of the central bank's thinking say board members will also discuss tweaking its purchases of exchange-traded funds, possibly by buying less funds linked to the 225-issue Nikkei Stock Average and more tied to the broader Topix index.
Such a move would be aimed at addressing criticism that the BOJ is inadvertently hiking the prices of certain stocks. It is believed to already own over 5 percent of more than 120 companies as of June. The bank, for example, holds 19.9 percent of Advantest Corp. and 17.8 percent of Fast Retailing Co., according to the NLI Research Institute's estimates.
While considering such adjustments, the central bank is expected to continue the monetary easing started under Governor Haruhiko Kuroda in 2013 amid stubbornly low inflation. Core consumer prices, which exclude volatile fresh food prices, rose just 0.8 percent in June from a year earlier, far below its 2 percent target.
The central bank will release a quarterly report on the economic outlook following the meeting, where board members are expected to cut their median forecast for inflation in fiscal 2018 to around 1 percent from 1.3 percent projected in April.
The BOJ will also downgrade the inflation forecast for fiscal 2019 to around 1.5 percent from 1.8 percent, and will also likely slightly lower the projection for fiscal 2020, currently set at 1.8 percent, according to sources close to the matter.