By Rie Ishiguro
TOKYO (Reuters) - The Bank of Japan is divided about the need to ease monetary policy next week, which may mean it delays taking action despite government calls for central bank measures to support the economy.
Governor Masaaki Shirakawa has repeatedly said the Bank of Japan is ready to act if needed, but sources say some BOJ officials want the central bank to save its dwindling arsenal of policy options in case the economy deteriorates further.
In addition, there is no set view in markets on what steps the BOJ would take if it was to act.
Several ministers have called on the BOJ to follow up government intervention to weaken the yen with monetary measures to support the economy.
Japan intervened in markets on September 15 to sell an estimated 2 trillion yen ($23.73 billion) after the currency rose to a 15 year high against the dollar, raising concerns among policymakers that its strength could undermine exports.
The government is also lining up a supplementary budget, although several ministers said on Tuesday its size was undecided.
"The problem for the BOJ is that its policy options are limited and it's hard to make decisions when most or some people on its policy board acknowledge that recent easing has had small impacts on markets," Adrian Foster, head of financial markets research with Rabobank International in Hong Kong, said.
"It is not intellectually rewarding when they keep expanding fund supplies but see the market impact is very very small."
Government concerns stem from growing evidence that the economic recovery is faltering.
Economic growth slipped from a healthy annualized rate of 5.0 percent in the first quarter of 2010 to just 1.5 percent in the second quarter. Data on Monday showed annual export growth dropped in August for a sixth straight month.
Shortly after the September 15 intervention, sources said the BOJ could loosen policy at its October 4-5 meeting if the economic recovery was deemed by the board to be under threat.
They said an increase in government bond buying and another expansion of its cheap fund-supply tool were emerging as the most likely policy options.
The Nikkei business daily said on Tuesday that the central bank may expand its fixed-rate loans and step up buying of short-term government debt.
But some BOJ officials want to wait until there is further evidence that a strong yen and slowing overseas growth are hurting the economy.
These officials argue that such evidence may be more apparent at the BOJ's October 28 meeting, when the BOJ publishes a twice-yearly economic and price outlook report.
The BOJ will also closely look at its own quarterly business survey, or tankan, due on Wednesday.
Regardless of timing, the BOJ is worried that any impact from its easing would be offset by fresh policy action from the U.S. Federal Reserve.
Analysts expect the Fed to announce its own government bond purchases as soon as its next meeting on November 2-3, a prospect already weighing on the dollar against the yen.
Fed officials are considering a more open-ended, smaller-scale bond buying programme compared with 2009, the Wall Street Journal reported. Divisions in the BOJ's nine-member board have been apparent in recent meetings.
One board member voted against an expansion of the BOJ's cheap loans scheme at an emergency BOJ meeting on August 30. Two members had opposed easing policy in March.
In the latest government call for action, Japan Economics Minister Banri Kaieda said the BOJ should consider lifting its ceiling on government bond holdings.
However, the BOJ has been wary of increasing its self-imposed ceiling. Indeed, Shirakawa has said there is hardly any evidence that massive expansion in central bank balance sheets stimulates the economy and prices.
(Additional reporting by Leika Kihara, Soham Chatterjee in Bangalore; Editing by Edmund Klamann and Neil Fullick)