By Leika Kihara

TOKYO, Reuters – On Friday the Bank of Japan will keep monetary policy loose and warn of increasing economic risk from Ukraine’s crisis. The Bank of Japan does not seem to be bothered by rising inflation prospects and expected U.S. rate increases.

Haruhiko Kuroda from the BOJ stated Japan would not follow European and U.S. counterparts who are eyeing interest rate increases, which he will likely repeat after his meeting briefing.

These dovish signals from the BOJ follow an expected Federal Reserve rate increase on Wednesday. They may further weaken the Japanese yen, which has fallen to a 5-year low against USD on the prospect of widerning Japan-U.S. Interest rate differentials.

The BOJ believes that a weakening yen will benefit the economy through rising exports. However, this could cause financial strain for households and retailers as it increases fuel costs and increase food imports.

These side effects complicate BOJ’s attempts to support a fragile economic recovery. This has been hampered by both supply restrictions and the impact on consumption of COVID-19 curbs.

Analysers say that communication problems will be faced by the BOJ as core consumer inflation, which is currently at zero, could accelerate to 2% from April. It’s due to rising fuel costs and the disappearing effects of cell phone fee cuts.

Seiichi Shimzu, chief of BOJ’s Monetary Affairs department, said Tuesday that Japan’s economy was still recovering from the effects of the pandemic.

“Cost-push inflation caused by rising fuel prices won’t enable Japan to sustainably, stably attain 2% inflation,” said he. He also stressed the BOJ’s determination to keep its ultra-easy policy.

The BOJ will keep its target rate for short-term interest at -0.1%, and the yield on the 10-year bonds around 0% during the policy meeting that ends Friday.

According to sources, Reuters has learned that BOJ forecasts an increase in inflation due to higher energy prices. It will also give a more negative outlook than January.

Analysts say that the central bank will likely maintain the projection of moderate economic recovery. However, policymakers would rather wait until April to get more information about how war in Ukraine might impact global growth.

A more detailed economic assessment will be conducted by the BOJ at its April 27-28 policy meeting. This is when it performs a quarterly review and update of its inflation, growth, and other estimates.

Although subdued inflation will prevent the BOJ’s tightening of policy soon, it warns that the BOJ won’t be able to increase its stimulus levels due to the diminishing ammunition.

The BOJ has little flexibility to reduce already low rates. According to sources, its first line defense would be to increase liquidity and buy more exchange-traded funds.