TOKYO: Prime Minister Shinzo Abe's landslide victory in Sunday's vote may be a double-edged sword for the Bank of Japan, which is looking to work with Abe to push for wage growth but may also face pressure to expand stimulus to bolster the fragile economy.
At the two-day meeting ending on Friday, which is the last review for the year, the central bank is widely expected to keep monetary settings unchanged and offer a slightly brighter view of the economy on tentative signs of recovery from recession, sources say.
While recent market volatility and gloomy consumer mood keep BoJ officials on guard against risks, they feel a rebound in exports and solid capital spending justify standing pat for now.
With Abe's huge election win solidifying his grip on power, the BoJ hopes to work with the premier to encourage companies to spend their huge pile of cash more on investment and wages.
Governor Haruhiko Kuroda may repeat his calls for companies to increase wages at his post-meeting news conference, as well as urge Abe to proceed with fiscal and structural reforms. "The BoJ has taken action and will continue to do so.
I hope you take action too, with an eye on what the economy looks like after it overcomes deflation," Kuroda told business leaders in Nagoya, central Japan, last month.
Under pressure from Abe, business leaders have pledged to do their utmost to increase wages, a welcome move for the BoJ which sees wage growth as key to the success of its stimulus programme aimed at accelerating inflation to 2 percent next year.
Some analysts, however, say Abe may also lean on the BoJ to do more next year if the economy falters, as he pledged to raise the sales tax in 2017 after having delayed it by 18 months.
The planned tax hike in seen as a test case of Abe's commitment to lower the nation's debt burden, the highest in the developed world, and fund welfare spending.
"If Abe shows his willingness to push through reforms and calls for help in supporting the economy, the BoJ may respond by easing again next year," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
Despite expanding stimulus in a move that caught markets off-guard in October, speculation of near-term easing continues to simmer, as core consumer inflation hit 0.9 percent and is seen slowing further on oil price falls.
The BoJ looks increasingly likely to cut its inflation forecasts next month, sources say, making its 2 percent target look ever more ambitious.
BoJ officials argue that they won't act again just in response to short-term price moves, and hope a rebound in exports and output underpin a fragile recovery.
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