BOJ head warns on bubbles while board mulls bolder easing
By Leika Kihara | January 25, 2013 6:07 PM EST
Bank of Japan Governor Masaaki Shirakawa warned that preventing credit bubbles was among the key tasks of the world's central banks even as he reaffirmed the BOJ's commitment to continued easing and its board was found to have considered more drastic proposals.
The BOJ may steer more towards unorthodox easing policies when Shirakawa's term ends in April after the nine-member board debated at its December policy meeting options beyond its traditional policy tool of increased asset purchases, minutes of the meeting showed.
"The BOJ is pursuing powerful monetary easing without interruption," Shirakawa told a news conference on Friday, repeating the bank's pledge to maintain its ultra-loose policy.
"Japan may be facing an opportunity now to emerge from stagnation. We wanted to keep that momentum alive," he said in explaining why the BOJ had expanded its monetary stimulus on Tuesday.
Under intense pressure from new Prime Minister Shinzo Abe for bolder efforts to beat deflation, the BOJ doubled its inflation target to 2 percent and made an open-ended commitment to asset buying at its January meeting, for its fourth dose of stimulus in six months.
Shirakawa defended the BOJ's decision not to set a binding deadline for achieving 2 percent inflation, arguing that it was going with the global norm of adopting a flexible inflation target that does not commit to a set timeframe.
"It's important to guide policy flexibly, scrutinising not just the economic and price outlook but various risks including financial imbalances," Shirakawa said.
"Long-term interest rates will spike and erode the effect of monetary easing ... if people perceive the BOJ as having shifted to a policy of recklessly buying government bonds, focusing narrow-mindedly on achieving 2 percent inflation."
Shirakawa also warned that central banks must play a key role in forestalling credit bubbles which, once created, would impose extremely large costs on economies.
RATE CUT AN OPTION?
Despite Shirakawa's concerns, many analysts expect the BOJ to ease monetary policy further, potentially with new steps, as Abe keeps up pressure on the bank to achieve its price target.
BOJ board member Koji Ishida proposed cutting the interest rate for the bank's fixed-rate market operation and other loan schemes to 0.03 percent from 0.1 percent at the December policy meeting, the minutes showed on Friday.
Ishida also proposed scrapping the 0.1 percent interest the central bank pays to financial institutions' excess reserves parked at the BOJ, arguing that doing so would help to reduce the yen's appeal as a safe-haven currency.
The proposals were both voted down 8-1, with most members saying that by pushing interest rates too low, they would discourage banks from lending to each other and undermine the proper functioning of the markets.
One member, in voting against the proposals, said the problem was more the timing, suggesting that scrapping the 0.1 percent floor on rates will remain a future policy option if the BOJ were to ease monetary policy again.
"It's important to continue examining the benefits and costs of scrapping the rate. But doing so now is too early because it may lead to a change in the BOJ's current monetary easing framework," the member was quoted as saying in the minutes.
The BOJ now sets its key policy rate, the overnight call rate target, at a range of zero to 0.1 percent. It also pays 0.1 percent interest on excess reserves, which prevents money market rates from falling below that level and serves as a floor on short-term interest rates. Shirakawa has been strongly opposed to scrapping the 0.1 percent floor on rates, on the view it would distort market functions.
With little room to cut already-low rates, the BOJ in 2010 put in place an asset-buying and lending programme as its key monetary easing tool. Under the scheme, the central bank has been pumping tens of billions of dollars a month into markets through asset purchases and fixed-rate market operations.
It also has several other loan programmes, including one offering funds at an interest rate of 0.1 percent to banks that boost lending to industries with growth potential, such as health care.
The BOJ eased policy in December via an increase in the asset-buying programme and pledged to review its inflation target in January.
In boosting asset purchases, a few members called for speeding up purchases of treasury discount bills as a way to narrow interest rate differentials between Japan and other countries, thereby helping to weaken the yen, the minutes showed.
(Reporting by Leika Kihara; Editing by Edmund Klamann)