BOJ starts policy meeting, rate hike bets recede

TOKYO, Jan 17 (Reuters) The Bank of Japan started a two-day policy meeting on Wednesday to debate the pros and cons of a rate hike as financial markets sharply scaled back their bets on a BOJ tightening following media reports that such a move is unlikely.

The reports surprised investors who had thought a rate increase to 0.50 percent from the current 0.25 percent was virtually certain, sending debt prices higher and the yen lower.

Public broadcaster NHK reported on Wednesday that it was becoming more likely the BOJ would keep rates on hold.

The Nikkei newspaper, Japan's biggest business daily, reported that views were emerging within the central bank that it should hold off from raising rates this week, although some board members were still calling for an increase.

If the BOJ decides to skip a rate hike this week it will consider boosting rates in February, the newspaper said, without citing sources.

Several other Japanese media reports also said the BOJ was unlikely to raise the overnight call rate at this week's meeting, mainly because it wanted to examine more data given the softness in consumption and prices in the past few months.

The flurry of reports drove investors to buy bonds, pushing the benchmark 10-year Japanese government bond yield down 6 basis points to 1.675 percent.

The two-year yield, the most sensitive to BOJ monetary policy, briefly fell 6.5 basis points to 0.765 percent, the lowest level since late December.

The yen slipped to a 13-month low around 120.80 yen to the dollar.

Interest rate derivatives markets are pricing in about a 30 percent chance of a BOJ rate hike on Thursday, sharply lower than around 80 percent priced in late on Tuesday.

Some government officials also told Reuters that they think the BOJ is more likely than not to refrain from pushing up rates. BOJ officials are not allowed to talk about its policy to outsiders during two business days before its policy meetings.

''Considering the softness in recent economic indicators, I don't think the BOJ can raise rates this week,'' said Naomi Hasegawa, a senior strategist at Mitsubishi UFJ Securities.

In the past few months, data on household spending and consumer prices has been patchy. Japan's economic growth in the fiscal year ending on March 31 also looks almost certain to fall short of the forecast the BOJ laid out in a report in October.

Still, BOJ sources have said many board members think data in the past month has alleviated worries that the economy is losing momentum.

The BOJ Board is also growing confident that Japan's economy will stay on a long-term expansion track, they have said.

Some analysts also said the BOJ may be risking being seen as succumbing to political pressures if it does not raise rates this week.

Some heavyweight politicians have openly called on the BOJ not to raise rates, saying a premature rate increase would not only damage the economy but also run counter to the government's policy to boost growth.

''The U.S. Federal Reserve has won its credibility today by fighting political pressures. The BOJ's now facing a test on its independence,'' said Mitsuru Saito, chief economist at Tokai Tokyo Securities.

Many economists think if the central bank keeps rates on hold this week it will raise them in February.

''Even if they don't raise rates tomorrow they will probably try to indicate that they will do it in February,'' said Seiji Adachi, a senior economist at Deutsche Securities.

Since July, when the BOJ raised rates for the first time in six years, it has said it will need to raise rates gradually to keep them commensurate with Japan's steady economic growth and to prevent an over-heating in the economy.

As financial markets are gripped by the BOJ's meeting, Japan's current account surplus data published earlier on Wednesday was largely ignored.

It showed the surplus rose 21.5 percent in November from a year earlier to 1.7564 trillion yen (.58 billion), less than economists' median forecast of a 33.6 percent rise to 1.93 trillion yen.

REUTERS PV BD1312