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UPDATE 2-BOJ head warns on bubbles while board mulls bolder easing
January 25, 2013 / 1:30 AM / in 5 years

UPDATE 2-BOJ head warns on bubbles while board mulls bolder easing

* Central banks must prevent bubbles -Shirakawa
    * BOJ considered cutting loan scheme rates at Dec meeting
    * Also mulled proposal to scrap 0.1 pct floor on rates
    * Some on BOJ board said more T-bill buying would help
weaken yen

 (Rewrites with Shirakawa quotes)
    By Leika Kihara
    TOKYO, Jan 25 (Reuters) - 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)

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