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The Bank of Japan said Thursday that easing anxiety over the country’s financial stability has increased the likelihood that its ultra-loose monetary policy will change.

This is the first time the BOJ has indicated a possible policy shift since it introduced its “quantitative easing” policy more than four years ago. Nevertheless, its Policy Board decided by majority vote the same day to leave the ultra-loose monetary policy intact.

“It is not certain whether there will be occasion to change the present framework of the quantitative easing policy during the projection period for this Outlook Report,” the BOJ said in its biannual Outlook for Economic Activity and Prices, released the same day.

It said, however, that “it is likely this possibility will gradually increase over the course of fiscal 2006.”

Under its quantitative easing policy, the BOJ injects excess funds into the money market and keeps interest rates effectively at zero.

The central bank cited the current stability in the financial system, adding that “the risk that financial system problems could affect (overall) economic activity seems to have receded significantly.”

As a result, financial institutions are demanding less liquidity, the BOJ said.

The financial system was hurt by a series of collapses involving banks and other institutions in the late 1990s.

The outlook is also backed by its view on the economy.

“Looking forward, Japan’s economic recovery is likely to gradually gather momentum from the middle of 2005 as the effects of adjustments in IT-related sectors diminish, and growth in fiscal 2005 is expected to slightly exceed the economy’s potential growth rate,” the BOJ report said.

“We expect the economic recovery to last for a long time, but we don’t think it will become something drastic or briefly boost people’s expectations for the growth rate,” BOJ Gov. Toshihiko Fukui told a news conference.

He did not elaborate on when the policy might change.

The Policy Board also decided to keep the target for the outstanding balance of banks’ deposits at the central bank at around 30 trillion yen to 35 trillion yen, it said in a statement.

This is the second time the board has failed to agree unanimously on monetary policy.

Two of the nine board members opposed Thursday’s decision, indicating the central bank might be moving closer to changing its long-maintained policy, analysts said.

In the report, the BOJ also downgraded its forecast for consumer prices in fiscal 2005, due to a fall in rice prices and electricity and telephone charges.

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