The Bank of Japan is expected to ease monetary policy on Tuesday for the second straight month by increasing asset purchases, as slumping exports and factory output heighten pressure for bolder action to support an economy on the cusp of recession.
Industrial production fell in September at the fastest pace since last year's earthquake and job availability dropped for the first time in more than three years, a sign the pain from the global slowdown and a territorial row with China was broadening.
The slew of negative data heightens the case for further easing by the BOJ, which is set to cut its growth forecasts and push back the timing for achieving its 1 percent inflation target in a twice-yearly report also due out on Tuesday.
"A slowdown in overseas economies and the end of government subsidies for fuel-efficient car purchases weighed on factory output. The deterioration in the Japan-China relationship may have affected it as well," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute in Tokyo.
"The BOJ has no choice but to implement monetary easing today. If the central bank doesn't ease, it would be significant negative impact (on markets)."
The most probable option for the central bank would be an increase in its asset buying and lending programme by at least 10 trillion yen (78 billion pounds).
Anything less is likely to disappoint markets and trigger an unwanted yen rise and falls in share prices, analysts say.
To maximise the market impact, the central bank may thus take additional steps such as making a stronger commitment to continue pumping cash until 1 percent inflation is achieved, say sources familiar with its thinking.
Any expansion in the 80-trillion-yen programme would be mostly for buying of government bonds, although there may also be a small increase in exchange-traded funds (ETF) and real estate investment trust (REIT) purchases, the sources say.
OUTPUT, SPENDING SLUMPS
Industrial output dropped 4.1 percent in September, marking the biggest fall since March last year and larger than a median market forecast for a 3.3 percent decline, data by the Ministry of Economy, Trade and Industry showed.
Manufacturers surveyed by the ministry expect output to fall 1.5 percent in October and rise 1.6 percent in November.
Household spending unexpectedly fell in September and job availability dropped for the first time since July 2009, boding ill on the outlook for domestic demand, which had made up for some of the weakness in exports in the first half of this year.
The BOJ set a 1 percent inflation target and expanded asset purchases in February, and followed up with another stimulus in April. It boosted asset purchases by 10 trillion yen again in September to ease the pain from the global slowdown.
But the government has piled renewed pressure on the BOJ, with consumer prices falling for five months in a row in September.
Economics Minister Seiji Maehara, who attended a rate review earlier this month to make a direct call for easing, said he plans to participate again on Tuesday.
Since 2003, the BOJ has never eased policy for two months in a row, usually opting instead to spend several months weighing the impact of its action on the economy before expanding stimulus again.
Bank lending rose just 1 percent in the year to September even as the BOJ pumped more than 60 trillion yen so far via its asset buying and lending programme, as companies remain reluctant to borrow for investment due to the murky outlook.
The central bank sees room to boost purchases in Japan's 685 trillion yen market for government bonds. But some in the bank worry that trying to nudge down yields further could distort markets with five-year bonds now yielding less than 0.2 percent.
Japan's economy outperformed most Group of Seven peers in the first half of this year on spending for reconstruction from last year's earthquake. But weak exports and a strong yen have led some analysts to project Japan may fall back into recession.
Two government representatives can attend BOJ policy meetings. They cannot vote but can express their views and request a delay in vote on policy decisions.
(Additional reporting by Stanley White and Kaori Kaneko; Editing by Jacqueline Wong)