Bank of Japan seems committed to more interest-free yen


Bank of Japan Members Were Ready to Take Action, Minutes Show

By Mayumi Otsuma
Bloomberg News
Thursday, December 24, 2009

TOKYO -- The Bank of Japan said "many" of its board members expressed readiness to act against financial market volatility last month, before officials held an emergency meeting to address a surge in the yen.

"Many" agreed "the bank would maintain its stance of responding promptly to changes in the market situation," according to minutes of the bank's Nov. 19-20 meeting released in Tokyo today. The central bank "would adopt the most effective method for money-market operations that conformed to changes in financial markets," the report said.

The central bank unveiled a 10 trillion yen ($110 billion) fixed-rate lending facility in an emergency meeting on Dec. 1 to lower borrowing costs and counter the yen's advance to a 14-year high against the dollar. Governor Masaaki Shirakawa has said the bank is ready to do more and can extend the lending program if the demand for cash jumps.

"The central bank's next option will probably be to provide abundant funds aggressively by utilizing the latest program," said Mari Iwashita, chief market economist at Nikko Cordial Securities Inc. in Tokyo. "Expanding the program will allow the bank to enhance the effect of its accommodative monetary policy."

The emergency meeting was prompted by the yen's advance to 84.83 on Nov. 27 and escalating warnings from Prime Minister Yukio Hatoyama's government about prolonged declines in consumer prices. Shirakawa in October had announced plans to end some of its emergency lending programs.

Hatoyama unveiled a 7.2 trillion-yen stimulus package, his first since coming to office in September, a week after the BOJ's emergency gathering.

Commercial banks are utilizing the central bank's program of offering them three-month loans at 0.1 percent. In a Dec. 16 auction, lenders asked to borrow 8.5 times more than the amount offered. Deputy Prime Minister Naoto Kan said this month BOJ policies have helped the yen decline.

The board kept its benchmark overnight lending rate at 0.1 percent in a unanimous vote at the November gathering. Members said the bank would maintain an "extremely accommodative financial environment," the minutes showed.

Board members also discussed how the bank should express its view on deflation, according to the minutes. One person said the bank should be careful about using the word to ensure it doesn't hurt corporate and consumer sentiment. Shirakawa on Nov. 30 said the central bank agreed with the government's view that the economy is in "mild" deflation.

The bank last week said it "does not tolerate a year-on-year rate of change in the CPI equal to or below 0 percent." Policy makers consider prices are stable as long as they are in a positive range equal to or below 2 percent. Analysts said the stance may signal the bank is committed to keeping interest rates at 0.1 percent until prices rise.

A Cabinet Office official attending the meeting, who wasn't identified by name, called on the bank to recognize the risks of deflation, the minutes said. Government representatives attend policy board meetings, though they don't vote on policy decisions.

A "few" members said the central bank should clearly explain that persistent price declines are being driven by weak demand and that it is "essential" for business sentiment and consumer spending to drive growth in order to overcome deflation.

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