TOKYO (Reuters) - Some Bank of Japan board members sought to supply longer-dated fixed-rate funds in market operations to curb excessive interest rate volatility but the proposal was dropped on opposition by policymakers who feared it could be misinterpreted by markets, minutes of the June rate review meeting showed on Wednesday.
The disagreement underscores the difference in views among the nine-member board on how quickly to respond to short-term market volatility, such as the rise in bond yields and a brief setback in share prices Japan experienced last month.
At the June 10-11 policy-setting meeting, the BOJ discussed, but did not put to a formal vote, the idea of extending the maximum duration of cheap, fixed-rate funds it offers via market operations from the current one year.
The idea emerged as a measure to stem market volatility when speculation over when the U.S. Federal Reserve would taper its bond-buying programme jolted global financial markets, pushing up bond yields and hitting stocks.
Such a move would have made it easier for banks that were caught wrong-footed by the spike in bond yields in late May to hedge their portfolios by reducing the need to sell bonds to balance their books, potentially dampening market swings.
Some BOJ board members promoted the idea, arguing that such operations "could be quite effective in restraining excessive interest rate fluctuations", according to the minutes released on Wednesday.
But others opposed it for fear the measure could be misinterpreted by markets as a change in the BOJ's monetary policy framework, rather than a minor fine-tuning of its market operations.
The members concluded that flexible operations under the BOJ's current framework would be enough to stabilise interest rates, deciding against putting the proposal to a formal vote.
"Most members shared that recognition that, given Japan's economy was on a steady path toward recovery, Japanese financial markets, which had shown volatile movements recently, were likely to gradually regain stability," the minutes showed.
At the June meeting, the BOJ left monetary policy unchanged as widely expected, maintaining its pledge to expand the supply of money at an annual pace of 60 trillion to 70 trillion yen (400-466 billion pounds) to achieve its 2 percent inflation target in two years.
Editing by Edmund Klamann and Eric Meijer