BoJ easing will be a domestic affair It may have been slow to the party but the Bank of Japan is expected to take the opportunity this Friday to bolster its credentials as the central bank most committed to monetary easing. Observers expect another Y5tn-10tn to be added to the BoJ's existing Y65tn asset-purchasing programme - or quantitative easing - which is its main policy tool, with interest rates near zero. Such an increase, the fifth since the programme was launched in October 2010, could mean that this year the BoJ reclaims its title as the central bank with the world's biggest balance sheet as a proportion of gross domestic product, toppling the European Central Bank. But unlike in the past, when loose monetary policy spurred yield-hungry Japanese investors to move into assets and currencies overseas, analysts do not expect much of this extra liquidity to spill outside Japan. Instead, with global markets still contorted by fears over Europe, they say it is likely to settle in two places: in banks" current deposits at the BoJ, which have roughly doubled since the asset-buying programme began, and in the Japanese government bond market, where the benchmark 10-year yield is pushing 18-month lows. The implications for the yen - and for domestic deflation, which should ease with a weaker currency - are not encouraging. "Right now, these are the only destinations that money is willing to go to," says Kyohei Morita, chief economist at Barclays in Tokyo. Caution still abounds in Japan among most classes of investor. Life assurers, for example, closely watched because the size of their assets can sway financial markets, report that yen-denominated bonds will remain their core holdings for the fiscal year that began in April. The biggest, Nippon Life, said this week that its exposure to foreign bonds with currency hedges would remain unchanged until March 2013, at about 11 per cent of its Y49tn assets. Both Nippon Life and the sector number two by assets, Dai-Ichi Life, expect the yen to average Y80 to the US dollar this fiscal year, stronger than the current Y81.45. Despite a 5 per cent fall in the yen against the dollar since mid-February, when the BoJ surprised markets by expanding the asset-buying programme while adopting a firmer "goal" for inflation, few investors have looked to restart "carry trade"-type strategies, says Mansoor Mohi-uddin, head of foreign exchange strategy at UBS in Singapore. Under such strategies, low-yielding yen borrowed at home is invested overseas in the hope of banking income and currency gains, a trend that weakens the Japanese currency. On the contrary, Japanese banks, insurers and asset managers have sold a cumulative Y331bn of foreign equities, bonds and money market instruments since then, according to Ministry of Finance data. Individual investors, too, are staying close to home. The Toshin market for publicly offered investment trusts, which account for the majority of households" non-yen assets, recorded net inflows of just Y12.8bn in March after five months of outflows, according to Japan's Investment Trusts Association. Since November, Japanese households have kept more net assets in a single emerging market - Brazil - than in the entire euro-area. "Yields abroad, offering a pick-up of perhaps 1 or 2 per cent, do not justify the risk," says Shogo Fujita, chief Japanese bond strategist at Bank of America Merrill Lynch in Tokyo, noting that the global market environment is "totally different" to previous rounds of easing by the BoJ between 2001 and 2006. Market expectations of looser policy have been building after the BoJ left its key settings unchanged in the first of its two meetings this month, and after governor Masaaki Shirakawa told a New York gathering last week the bank was "fully committed" to "continuing powerful monetary easing." Morgan Stanley MUFG Securities has ascribed a "near-100 per cent" probability of further action, anticipating that the BoJ's updated inflation forecasts will fall short of the 1 per cent goal it set in February. Core consumer price inflation - excluding food and energy - stood at minus 0.6 per cent in February, the 36th negative reading in a row. Falling prices reinforce the appeal of the government bond market, where direct buying under the programme has helped to drive down yields on two-year JGBs close to the upper range of the policy rate of 0.1 per cent. "[Yields] have almost nowhere to go," says Mr Morita of Barclays. But until rates overseas start to diverge significantly from Japan's, say analysts, there will be no repeat of the past decade, when cash poured out of the country after the BoJ became the first central bank to embrace some form of quantitative easing. "The [BoJ] would love a surge in overseas investment to weaken the yen, but the environment is just not right," says Adrian Foster, head of financial markets research at Rabobank in Hong Kong. No one is braced for a flood of Japanese liquidity.