The Bank of Japan may begin withdrawing from credit markets on Friday but leave in place a key loan scheme that could relieve government pressure on it to support corporate borrowing until the economy achieves a solid recovery.
To fend off criticism that its moves could hurt Japan's fragile economy, the BOJ will likely stress that it will keep interest rates near zero for several years to come.
Banking minister Shizuka Kamei, who had been the most vocal opponent of BOJ attempts to unwind its corporate life support, said he wouldn't intervene in the bank's debate on whether to end its commercial paper and corporate bond buying.
But he added that he hoped the BOJ's decision would take into account the real state of the economy, barely out of recession and mired in deflation.
"It's hard to foresee price falls ending any time soon," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"It would be outrageous if the BOJ weren't doing anything to beat deflation and rather paving the ground for an exit from its easy monetary policy."
The BOJ is expected to let its CP and corporate bond buying programmes expire because of the diminishing role they are playing with credit markets on the mend.
But it may keep offering its widely tapped low-interest loans to banks as it tries to build a relationship with Prime Minister Yukio Hatoyama's month-old administration.
Even a partial withdrawal from credit markets may be a tough sell, though, as the central bank looks set to forecast three years of deflation in its half-yearly outlook report due out after the rate review.
"I'm not sure how the BOJ would justify not doing anything beyond keeping rates near zero when it's predicting three years of deflation," said Hirokata Kusaba, senior economist at Mizuho Research Institute.
"The government may ask the BOJ to do more to beat deflation, such as by reverting to quantitative easing or implementing some form of credit easing. That's a very valid point and hard to argue against."
In a sign weak demand is playing an increasing part in pushing down prices, the so-called core-core consumer price index, which strips out food and energy costs, fell 1.0 percent in September from a year ago, larger than than the 0.9 percent seen in the year to August.
The BOJ has kept interest rates at 0.1 percent and in July it extended the emergency measures it put in place in several stages from December last year through February this year.
Central banks around the world have begun debating how and when to phase out their emergency steps to contain the damage wrought by the worst global financial crisis in decades.
But the government has pressed the BOJ to continue its corporate debt buying and other measures the central bank says are no longer necessary because credit markets have largely recovered from the shock of the global financial crisis.
BOJ officials won't admit that government pressure could influence its monetary policy decisions. But they do want to work closely with the government, and they have got the message that it isn't happy about the BOJ's view of the economy.
Market players say there is no clear consensus on whether the BOJ will decide to wind down its support for corporate finance on Friday, although three-month euroyen futures may dip if the bank does let some of its support steps expire in December.
The BOJ's CP buying auction on Oct. 23 drew no bids for the third time in a row, and issuance rates are now lower than the cost of government borrowing, which BOJ officials point to as the market-distorting drawback of maintaining the programme too long.
Exiting the special loan programme, in which the BOJ lends to banks at 0.1 percent interest in exchange for collateral, would be more tricky because the government appreciates the role this plays in helping cap interbank lending rates.
Overall, though, the impact on government bonds and money market rates would be limited as ending the emergency steps won't alter market expectations that the BOJ will keep rates near zero until 2011 at the earliest.
