TOKYO (Reuters) - Bank of Japan policymakers last month debated the feasibility of making further tweaks to their ultra-loose monetary framework, with one member arguing that capping bond yields around zero could be counter-productive, a summary of opinions at the rate review showed on Thursday.
At the October meeting, the BOJ cut its inflation forecasts and maintained its massive stimulus programme called yield curve control (YCC) - a policy that guides short-term rates at minus 0.1 percent and the 10-year bond yield around zero percent.
It also issued a stronger warning over the possibility that prolonged easing could hurt bank profits, and discourage them from boosting lending or take on excessive risk.
While most BOJ policymakers stressed the need to continue the current ultra-easy monetary policy, one of them said keeping bond yields capped around zero could “diminish the positive effects on inflation expectations,” the summary showed.
“It is important to consider in a flexible manner” whether there is room to allow bond yields to move in a wider trading band or changing the target maturity of government bonds, the board member was quoted as saying.
Another board member opposed such a move, saying that further widening the trading band for yields could erode market confidence over the BOJ’s commitment to its 2 percent inflation target.
The board debated what role monetary policy could play in easing the strain on financial institutions, in a sign of growing worries within the central bank over the plight of regional banks.
“Since regional financial institutions have increased relatively high-risk loans ... there is a risk their profits would worsen at an accelerated pace if the economy moves into a downturn,” one board member was quoted as saying in the summary.
Another board member, however, said monetary policy alone cannot fix Japan’s banking-sector problems, arguing that the role regulatory oversight plays “should not be over-looked.”
The BOJ’s nine-member board has been divided between those who are worried about the rising cost of prolonged easing, and those who insist the BOJ should do more to accelerate inflation towards its 2 percent target.
Subdued inflation has forced the BOJ to maintain its huge stimulus despite the rising costs, such as the hit to bank profits from years of near-zero rates and dwindling bond market trading due to the central bank’s huge asset purchases.
The central bank took steps in July to make its policy framework more sustainable, such as allowing 10-year yields to move at double the previous trading band of around minus 0.1 to 0.1 percent.
But the move has done little to prop up bond market trading, prompting calls from some analysts for the BOJ to further widen the trading band, or target shorter-term yields so that the longer end of the yield curve could rise more.
The summary of opinions does not identify the policymakers whose comments are quoted.
Reporting by Leika Kihara; Editing by Chang-Ran Kim & Shri Navaratnam