By Leika Kihara
TOKYO (Reuters) - The Bank of Japan is expected to keep monetary policy steady on Friday and hope the extension of an existing fund-aid package will give companies enough time to weather the hit from a recent resurgence in coronavirus infections.
A stable yen, rising stocks and rebounding overseas demand have offered some breathing space for policymakers struggling to underpin a fragile recovery with a dearth of ammunition.
But lingering fears over the pandemic have kept service demand weak. Mounting COVID-19 cases forced the government to suspend a discount programme aimed at propping up spending on travel - but criticized for spreading the virus.
With the outlook highly uncertain, the BOJ is likely to decide on Friday to extend a range of steps aimed at easing corporate funding strains as a precaution against the deepening pain from COVID-19, sources have told Reuters.
The central bank, however, is set to keep its interest rate targets steady at the two-day rate review ending on Friday, and maintain the view the world's third-largest economy will improve moderately as a trend.
"Considering the side effects on financial institutions' profits, we believe that digging further into negative interest rate territory will be avoided" unless the yen breaches the 100 mark against the dollar, said Naoya Oshikubo, senior economist at SuMi TRUST.
The dollar/yen has moved in a tight range recently and stood around 103.50 yen on Wednesday. A move below 100 yen usually triggers verbal warning by Japanese policymakers worried about the impact a strong yen could have on exports.
Under a policy dubbed yield curve control, the BOJ guides short-term rates at -0.1% and 10-year bond yields around zero.
The BOJ also created a package of measures to cushion the blow from COVID-19 in March through May, which included an increase in purchases of corporate debt and a creation of a new lending facility to channel money via banks to cash-strapped firms.
Markets widely expect the BOJ to extend the deadline for the package as the resurgence in infections cloud the outlook.
BOJ officials say expanding the programmes will be the first line of defense against additional strains from the pandemic, though they do not rule out rate cuts as among policy options.
Markets are focusing on how BOJ Governor Haruhiko Kuroda would describe risks to growth from the recent resurgence in infections at his post-meeting briefing.
Japan's economy rebounded in July-September from its worst postwar contraction in the second quarter, though the third wave of infections is dampening prospects for a strong recovery.
The government last week announced a fresh $708 billion economic stimulus package to speed up the recovery, bringing the combined value of Japan's pandemic-related spending to about $3 trillion.