A rift among Bank of Japan board members over how to achieve the new 2 percent inflation target means the central bank's next governor may have to move more cautiously than markets expect in stimulating the economy.
Prime Minister Shinzo Abe has demanded bold action from the BOJ, raising expectations the next governor will shake up policy and finally manage what previous governors have not - to jump start an economy that has stagnated for years.
But sources familiar with central bank thinking said that while the central bank may well ease policy under an existing asset-buying program, fresh ideas to expand the balance sheet more aggressively may be months away.
That's because the new governor will face the challenge of trying to reach consensus on a board split over the feasibility of seeking a 2 percent inflation target and how best to achieve it, they said. They declined to be identified because of the sensitivity of the issue.
Incumbent BOJ Governor Masaaki Shirakawa and his two deputies step down on March 19. The BOJ will hold its first policy meeting under a new leadership on April 3-4 if parliamentary approval of Abe's nominees goes smoothly.
To keep easing policy, the meeting will have little choice but to continue with the steps already adopted of boosting asset purchases and buying government bonds, analysts said. Anything more ambitious is unlikely.
"What we have now is a very fragmented board, confused on what the BOJ is really trying to achieve. Reaching a consensus will be tough," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo.
Under pressure from Abe, the central bank agreed in January to double its inflation target to 2 percent and committed to "open ended" asset buying from 2014.
His persistent pressure to shift the central bank to more aggressive action has driven the yen down to a 33-month low against the dollar, lifted share prices and given the export-reliant economy hope of relief from the fourth recession since 2000.
The BOJ board will be dominated by those in favor of further easing but that is about where consensus ends.
It is split on everything else, including the feasibility of trying to achieve 2 percent inflation in an economy that has rarely seen prices rise to that level, except for blips caused by tax hikes or a spike in energy costs.
Board members Takehiro Sato and Takahide Kiuchi voted against the BOJ's decision in January to double the inflation target. They felt 2 percent inflation was not sustainable in Japan, minutes of the meeting released on Tuesday show.
"Even if the central bank were to set 2 percent inflation as a target, this alone was highly unlikely to have a substantial influence on inflation expectations," they were quoted as saying in the minutes.
That contrasted with the BOJ's official line that by setting a new inflation target, the central bank could show its resolve to beat deflation and alter public expectations that prices will continue to fall.
The two dissenters are not necessarily opposed to further easing. They voted with the board at the same January meeting on the decision to make an "open-ended" commitment to buy assets from next year.
But there is hardly any consensus on how the BOJ should try to beat deflation, which has weighed on the economy for so long that consumer expectations of falling prices are entrenched.
Some board members want the BOJ to focus on nudging down longer-term interest rates by buying longer-dated government bonds, the sources say. A reduction in longer-term interest rates might encourage longer-term lending and thus investment in the economy, the thinking goes.
Others prefer scrapping a 0.1 percent floor set by the central bank on money market rates, or want the central bank to buy treasury discount bills forcefully. Both measures would be aimed at pushing down short-term rates and to help weaken the yen.
Policymaker Ryuzo Miyao, a former academic, proposed strengthening the BOJ's commitment to ultra-easy monetary policy by pledging to keep interest rates virtually at zero until 2 percent inflation is in sight. That would be more binding than the BOJ's current commitment to maintain zero rates and asset purchases "for as long as needed."
Miyao's idea was turned down at a policy review last week.
The more unorthodox step of buying foreign bonds is fading as a near-term possibility as Japan faces heat from fellow members of the Group of 20 leading economies.
The fall in the yen has already sparked concern Japan's policies could encourage competitive currency devaluations, although the G20 refrained from directly criticizing Japan at a financial leaders' meeting last weekend.
Even Sato, initially an advocate of buying foreign bonds, has toned down his calls and stressed the hurdles that must be met, such as seeking global consent for such a step. Foreign bond buying is considered a more radical option for the central bank because it would be seen as tantamount to currency intervention.
"Given the global debate surrounding Japan, it may be hard for the BOJ to consider buying foreign bonds," said one source.
So while the BOJ may well ease policy as early as in April, it is likely to opt for another increase in its asset-buying program, rather than a new measure, analysts say.
Indeed, the sources said that given the board split, new ideas for policies may be months away.
The BOJ might also extend the duration of government bonds it targets under its asset-buying program to five years from the current three years, an option floated by a few board members in January as a way to pressure the longer end of the yield curve.
For the time being, the only realistic option left for the central bank may be to continue buying government bonds, said one of the sources.
"The only question is how aggressively it will do this."