Bank of Japan (BoJ) governor Toshihiko Fukui faces a test of leadership this week on whether to propose an interest rate rise in the face of mixed signals on the health of the country's economy, analysts say.
Japan's economy logged its strongest growth in almost three years in the fourth quarter of last year, but some analysts doubt whether it will be enough to persuade the BoJ to raise interest rates from 0.25 percent on Wednesday.
Many said it was too close to call, particularly after the market confusion seen last month over the BoJ's decision to stand pat amid political pressure not to raise rates, despite earlier expectations that it would.
"It's a relatively close thing," said Peter Morgan, chief economist for Asia at HSBC Securities in Hong Kong.
He estimated there was slightly less than a 50 percent chance of a rate hike this month, pointing to weakness in consumer spending and wages.
Richard Jerram, chief economist for Macquarie Securities in Tokyo, took a similar view
"It looks like a close call and the lack of clarity over the basis for the decision implies significant uncertainties," he said.
Last month the BoJ policy board was split for the first time in almost a year as three of the nine members voted against Fukui's proposal to leave interest rates unchanged.
Barclays Capital strategist Masuhisa Kobayashi said that if Fukui made a proposal to hold interest rates steady again this week there was a chance it would pass five to four -- "hardly an impressive show of solidarity."
"We believe it is the moment of truth and that Fukui's leadership will now be put to the test," he added.
Japan's GDP grew 1.2 percent in the three months to December for an annualized pace of 4.8 percent, an eighth straight positive quarter and the strongest since early 2004, the government said last week.
But although private consumption grew by 1.1 percent, helping to drive overall growth, it was flat for the second half of last year as a whole.
"Recent personal consumption and price trends do little to justify a rate hike in February following the no-go in January," argued Morgan Stanley economists Takehiro Sato and Takeshi Yamaguchi in a statement.
But they added: "With GDP having strengthened, it is difficult to dismiss out of hand a rate hike in February," rating the chances of a hike this week at 51 percent.
The bank, which has independence in setting monetary policy, raised interest rates to 0.25 percent last July, ending its unorthodox five-year policy of keeping borrowing costs at almost zero in a bid to boost the economy.
Fukui has since warned of the dangers of maintaining very low interest rates for too long, arguing for a need to return to a more normal monetary policy stance.
But he faces political resistance. Economic and Fiscal Policy Minister Hiroko Ota called on the BoJ last week to continue "to support the economy," reflecting the government's view that it is too soon to raise rates again.
Fukui also cautioned about the outlook for the world's second-largest economy last week, saying risks to growth remained.
"I'm not so optimistic as to say risky factors are disappearing," he told a parliamentary budget committee.
Japan, which for years was beset by stagnant growth and on-off recessions, is now in the midst of its longest sustained expansion since World War II.
But inflation remains tame, with core consumer prices up just 0.1 percent in December from a year earlier.
Hiromichi Shirakawa, chief economist for Japan at Credit Suisse, said the BoJ had been overly optimistic when it had earlier forecast steadier wage costs and easing downward price pressures.
"It's very difficult to argue that deflation is ending in Japan," he said.
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