By Kaori Kaneko
TOKYO (Reuters) - Expectations have risen sharply that the Bank of Japan's next policy move will be to ease further, a Reuters poll of economists found, as the U.S. Federal Reserve looks set to cut interest rates this month for the first time in over a decade.
Three-quarters of economists said the BOJ's next move would be to expand stimulus, up from about half last month and 38% just two months ago. Almost two-thirds of those who predicted easing expect it within the year and some as early as this month.
Speculation had already been growing for further easing as the U.S.-China trade war and weakening global demand threaten Japan's export-reliant economy.
Fed rate cuts could inflict further damage by boosting the yen against the dollar, making Japanese exports less competitive and eroding profits when repatriated to Japan. A major effect of the BOJ's massive stimulus since 2013 has been a weaker yen.
"The pace of the yen's appreciation against the dollar when the Fed starts cutting rates will definitely help decide whether the BOJ needs to adopt more easing," said Yasunari Ueno, chief market economist at Mizuho Securities.
"If the gap in interest rates between Japan and the United States shrinks and U.S. shares tumble at the same time, the yen could try 100 yen per dollar. Then the BOJ will have to ease further knowing there would be side effects."
The Japanese currency last strengthened beyond 100 to the dollar in August 2016. It traded around 107.90 on Thursday.
U.S. Federal Reserve policymakers, moving toward their first interest rate reduction in a decade later this month, on Tuesday sketched out arguments for whether rates should be cut by a quarter or a half a percentage point.
Thirty of 40 economists predicted the BOJ's next move would be to loosen policy further, while 10 said the bank would tighten, the July 3-16 poll found.
Seven of the economists who forecast more easing said the central bank would ease this month, six predicted September, five selected October and two said December.
Among possible steps, 25 economists expected the BOJ to tweak its forward guidance. The BOJ pledges to keep very low interest rates "at least through around the spring of 2020" and economists predicted the central bank would extend this period.
Eight economists said the BOJ would increase its buying of exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs). Three predicted the bank would deepen its negative interest rates only, while two forecast that it could cut both its negative interest rates and the 10-year bond yield target. This question allowed multiple answers.
Under a policy dubbed yield curve control, the BOJ guides short-term rates at -0.1% and the 10-year bond yield around 0%.
At last month's policy review, the BOJ kept policy steady but Governor Haruhiko Kuroda signaled its readiness to ramp up stimulus as global risks cloud the economic outlook, joining U.S. and European central banks in dropping hints of additional easing.
JAPAN-SOUTH KOREA FEUD
Tokyo and Seoul are in an escalating row after Japan recently announced tighter controls on exports to South Korea of some materials used to make smartphone displays and chips.
Asked about the Japanese government's decision, 15 of 23 economists said they did not support the move, while eight responded they did, the poll found.
Asked how the move would affect Japan's economy, 15 economists saw "little impact" and two said "no impact", while 12 projected a "moderate impact."
"The direct impact will be limited," said Kazuma Maeda, economist at Barclays (LON:BARC) Securities Japan.
"But we need to watch for an indirect impact on Japanese production of things like electronic parts and devices, if the export curbs have an unforeseen impact on the global supply chain for the semiconductor industry."
The poll also found Japan's economy would expand 0.5% in the fiscal year to March 2020, having contracting an annualized 1.8% in the fourth quarter when growth is hit by a scheduled sales tax hike in October. It is projected to grow at the same rate of 0.5% in the next fiscal year.
"We expect Japan will avoid falling into recession thanks to solid domestic demand such as public investment and capital expenditure," said Yosuke Yasui, senior economist at Japan Research Institute.
The nation's core consumer price index, which includes oil products but not fresh foods, will rise 0.7% this fiscal year and 0.6% the following year, the poll showed.
(Polling and reporting by Kaori Kaneko; Additional polling by Khushboo Mittal in BENGALURU; Editing by Chris Gallagher and Sam Holmes)