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Analysis: BoJ's Kuroda tested by divided board

Bank of Japan's (BOJ) Governor Haruhiko Kuroda attends the upper house Financial Affairs committee of the Parliament in Tokyo March 28, 2013
Bank of Japan's (BOJ) Governor Haruhiko Kuroda attends the upper house Financial Affairs committee of the Parliament in Tokyo March 28, 2013

By Leika Kihara

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda is struggling to build a consensus ahead of his first central bank board meeting this week, risking disappointing markets that expect hefty bond purchases and a radical shift in its policymaking framework.

Conversations with sources since last week have thrown up the possibility that Kuroda may not be able to sway a board divided on how much the BOJ should ramp up bond buying and how to convince markets it will not monetize public debt.

Just two weeks into the job, Kuroda told parliament on Tuesday he wants to combine the BOJ's two bond-buying operations to clarify how much it is expanding its balance sheet, and that he would debate with the board targeting longer-dated bonds in expanding stimulus.

But failure to mend the gap with board members before Thursday's decision would mean Kuroda, who has promised to do whatever it takes to restart Japan's economy, would either have to put off some of his plans until another rate review on April 26, or push them through at the risk of a split vote.

The sources familiar with the BOJ's thinking said Kuroda was likely to muscle through most of his plans, but a split vote would test his leadership and cast doubt on whether he can commit the BOJ to further unorthodox measures.

"The BOJ doesn't necessarily have to decide on everything this week. Trying to do so could expose to markets the rift within the board," said Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo.

"In any case, there's simply not enough time to discuss so many factors that come into play. The key is how Kuroda manages to sustain market expectations."

The BOJ is likely to start open-ended asset purchases immediately, rather than in 2014, boost bond buying and extend the maturity of bonds it buys in easing policy this week, ideas that have been floated on the board even before Kuroda joined the central bank, sources have told Reuters.

Delaying a makeover of the BOJ's policy framework is unacceptable for Kuroda, who has a mandate from Prime Minister Shinzo Abe to engineer a "regime change" from his predecessor's cautious, gradual approach.

But Kuroda's idea of combining two bond-buying programs may face resistance from some in the board wary of loading up the central bank's balance sheet with too much long-term debt.

"In the end, Kuroda is one of nine board members that make a decision," another source said.

SEEKING ALTERNATIVE

Markets have started bracing for the possibility the BOJ may not decide on everything in one go, paring some of the exuberance that last month knocked the yen to a 3-1/2 year low against the dollar and pushed stocks to 4-1/2 year highs.

On Tuesday the yen rose to a one-month high, and the stock market fell to a four-week low.

Under pressure from Abe for bolder efforts to beat deflation, the BOJ eased policy in January and doubled its inflation target to 2 percent, a level Kuroda has since pledged to achieve in two years -- a target many see as overly ambitious.

Since assuming the post on March 20, Kuroda has said he will do whatever it takes to achieve the price target.

Analysts say it would be tough to surprise markets given they have priced in ideas such as bringing forward the timing of open-ended bond buying and setting a new policy target focusing on the size of BOJ's balance sheet.

The sticking point is the framework in which to buy assets.

Kuroda wants to combine the asset-buying and lending program, the BOJ's key monetary easing tool, and a separate bond-buying scheme dubbed "rinban," which is part of its market operations but not categorized as monetary easing.

The asset-buying program only targets bonds with maturity of up to three years, while the rinban targets bonds across the yield curve, including those with duration of over 10 years.

Combining the two would allow the BOJ to buy long-term bonds in huge amounts. This mean the BOJ will scrap a self-imposed rule, called the "bank note" rule, that caps the balance of its bond holdings to the value of bank notes in circulation.

Board member Sayuri Shirai supports the idea but some on the board fret about scrapping the rule without coming up with an alternative guideline to prevent the BOJ from going on an excessive bond-buying spree.

Kuroda has only said that he would discuss the topic with the board, but discussions may take longer than he wants.

"It may be easy to get rid of the rule. But the idea behind it -- that there needs to be some restraint in how much bonds the BOJ buys -- must be respected," another source said.

(Additional reporting by Tetsushi Kajimoto; Editing by John Mair)

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