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BOJ board at odds over steps to calm market - minutes
July 17, 2013 / 6:06 AM / 4 years ago

BOJ board at odds over steps to calm market - minutes

TOKYO (Reuters) - Bank of Japan policymakers were at odds over whether to take new steps to calm bond markets in June with some worried that doing so would give investors the impression it was over-reacting to short-term swings, minutes of the June rate review showed.

A man walks past the Bank of Japan headquarters in Tokyo July 5, 2013. REUTERS/Toru Hanai

While markets have settled down since, the disagreement underscores a difference in views among the nine-member board on how quickly to respond to volatility, such as the rise in bond yields and a brief setback in share prices that Japan experienced in late May and early June.

At the policy-setting meeting in June, 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.

Some BOJ board members argued 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 misread by markets as signalling a change in the BOJ’s policy framework, rather than a minor fine-tuning of its market operations.

The board concluded that flexible operations under the current framework would be enough to stabilise interest rates.

“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.

The idea emerged as a means to stem market volatility when speculation over when the U.S. Federal Reserve would taper its bond-buying programme jolted global markets, pushing up bond yields and hitting stocks.

Such a move would have made it easier for banks 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.

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 ($604-705 billion) to achieve 2 percent inflation in two years. It also stood pat at a subsequent policy meeting in July.


BOJ Governor Haruhiko Kuroda has said the bank would not react to short-term market moves because it abandoned the incremental policy approach of his predecessor.

But the June minutes revealed some board members were more sensitive to market volatility, after the yield on 10-year bond struck a one-year high of 1 percent in late May, with global markets roiled by speculation that the Fed could begin tapering its asset purchases within months.

At the June policy meeting, the board also engaged in debate on the feasibility of promising to achieve 2 percent inflation in two years, a goal analysts criticise as too ambitious.

Board member Takahide Kiuchi repeated his solo proposal, which was turned down, to make 2 percent inflation a long-term goal instead of committing to achieve it in two years. He also said the BOJ should set a two-year deadline to its ultra-easy policy, so it can adjust policy flexibly after that.

But one board member countered that the BOJ’s current framework leaves enough flexibility for future policy changes, while another said setting a two-year deadline would diminish the effect of its ultra-loose policy, the minutes showed.

Kazumasa Iwata, a former deputy BOJ governor who now heads the Japan Center for Economic Research, a private think tank, agrees with Kiuchi that Japan may need more than two years to see inflation accelerate to 2 percent.

“I think it’s possible in roughly five years, but not two years,” he told Reuters in an interview on Wednesday.

“Achieving 2 percent inflation is also possible only on condition the government makes efforts to achieve 2 percent economic growth in the medium-term perspective.”

($1 = 99.2850 Japanese yen)

Editing by Edmund Klamann and Simon Cameron-Moore

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