(For more stories on the Japanese economy, click [ID:nECONJP])
* BOJ seen keeping rates on hold at 0.10 pct
* BOJ growing confident on companies financing at end-March
* Board board members may consider further steps for future
* Policy decision expected around noon to 2:00 p.m. on Weds (Repeats ahead of financial market openings on Monday)
By Hideyuki Sano
TOKYO, March 13 (Reuters) - After a string of moves to ease a corporate credit crunch and two rate cuts in recent months, the Bank of Japan is expected to hold back on any new measures at its next meeting, to see how well its actions are working.
The central bank is worried about the deteriorating Japanese economy and may discuss contingency plans at the March 17-18 meeting, but for now prefers to wait and see.
"I'm sure they have more measures in mind, such as increasing government bond buying, but they are unlikely to do that now," said Junko Nishioka, chief economist at RBS Securities.
Japan's economy is sinking at its fastest rate since the 1974 oil crisis. Gross domestic product contracted 3.2 percent in the last quarter and economists fear a rising pile of unsold goods could signal a similar contraction in January-March.
BOJ governor Masaaki Shirakawa said on Friday he needed to watch for any further deterioration in Japan's economy but added that corporate short-term credit markets were clearly recovering.
The central bank is worried that a credit squeeze, on top of sliding sales, will send more Japanese companies to the wall.
Analysts expect the BOJ to keep interest rates on hold at 0.10 percent at its policy meeting as it grows more confident that banks and companies have secured enough cash to get them past the end their financial year on March 31.
CASH SQUEEZE EASING
Conditions in Japanese money markets have improved in the past few months after the central bank adopted unconventional policies such as outright buying of commercial paper.
The average rate on new one-month commercial paper declined
to 0.66 percent in February, after peaking at 1.34 percent in
December
The BOJ is also providing an unlimited amount of funds at 0.10 percent for three months, as long as banks provide corporate debt as collateral. That helped to bring down so-called term rates for periods longer than overnight.
But for all the improvement in markets, economic woes look set to persist, as the Japanese economy struggles in its worst recession since World War Two, with the country's leading exporters facing collapsing demand worldwide.
Toyota Motor <7203.T> and other manufactures have shut some factories temporarily and sent staff on enforced holidays.
Many economists say the economy will keep shrinking until later this year and some worry that even that estimate may be too optimistic given fragile global demand, on which Japan has relied heavily for growth.
Industrial production is now around 30 percent below its peak and many companies are expected to report sizeable losses for the year to March, with major tech companies such as Sony Corp <6758.T> warning of record pools of red ink.
That could trigger a wave of credit downgrades and could possibly rekindle tensions in credit markets, analysts said.
Japanese banks have been increasing lending at a record pace but could turn cautious should the economy deteriorate more.
Some analysts think the BOJ may consider buying riskier corporate debt products in the future, but others think such a scheme would be difficult without a government guarantee to cover any losses.
Another possible step is an increase in its outright buying of government bonds. The BOJ has raised its buying to 1.4 trillion yen of JGBs a month from 1.2 trillion yen in December. [ID:nT241454]
But the bank may have only one chance to increase its JGB buying and may want to play that card wisely, analysts said.
The BOJ holds more than 64 trillion yen of government bonds on its balance sheet and a boost in buying would likely test its rule that its JGB holdings should not exceed yen notes in circulation -- currently 76 trillion yen.
"I think the BOJ would want to increase buying when JGB issuance will increase to finance a stimulus package later this year," said Koji Ochiai, senior strategist at Mizuho Investors Securities. "If they did it now, they would be wasting ammunition."
Japan's government plans a new stimulus package by early April, on top of existing plans to spend 12 trillion yen to boost the economy. (Editing by Kim Coghill)