New BOJ board members warn against debt underwriting

TOKYO Tue Jul 12, 2011 9:18pm EDT

A woman walks past the Bank of Japan building in Tokyo June 14, 2011. REUTERS/Yuriko Nakao

A woman walks past the Bank of Japan building in Tokyo June 14, 2011.

Credit: Reuters/Yuriko Nakao

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TOKYO (Reuters) - A new Bank of Japan board member, Koji Ishida, said on Wednesday the central bank should avoid directly underwriting government debt because doing so could destabilize financial markets.

The BOJ's underwriting of government debt would give markets the impression that financial markets are having difficulty absorbing bonds and could trigger a sovereign rating downgrade by ratings agencies, Ishida said at a lower house parliament committee.

"That would destabilize financial markets that are currently stable, so it should be avoided," Ishida said.

Sayuri Shirai, another new member of the BOJ's board, also reiterated the central bank's opposition toward underwriting government debt.

"I know Japan is now faced with difficulties. But that is why it's important to ensure market trust," (in Japan's ability to manage its finances) she said.

Credit rating agencies have threatened to downgrade Japan's sovereign rating unless it comes up with tax and social welfare reforms to rein in its huge public debt which, at double the size of its $5 trillion economy, is the biggest among major industrialized nations.

Some lawmakers have urged the BOJ to directly underwrite debt so the government can fund spending for reconstruction from the devastating earthquake in March without selling more bonds in the market.

Finance Minister Yoshihiko Noda and Economics Minister Kaoru Yosano have shrugged off the idea, but some analysts say calls on the central bank to buy more bonds may gain momentum when the government compiles a third extra budget set to involve big spending for post-quake reconstruction.

The central bank strongly opposes underwriting bonds, or printing money to finance government debt, warning that doing so would hurt market trust in Japan's finances and could trigger a spike in long-term interest rates.

Ishida, a veteran banker and a former leasing company head, joined the board last month, succeeding Tadao Noda, also a former bank executive. Shirai, a former IMF economist, joined the board in April.

(Editing by Edwina Gibbs)

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