UPDATE 2-BOJ board at odds over steps to calm market - minutes

Wed Jul 17, 2013 2:03am EDT

Related Topics

* BOJ debated offering longer-dated funds via mkt operations
    * Some saw step as effective in curbing volatility-minutes
    * Others opposed for fear of being misinterpreted-minutes
    * One member said Fed policy to keep markets volatile
    * Japan needs 5 yrs to see 2 pct inflation-ex-BOJ deputy gov


    By Leika Kihara
    TOKYO, July 17 (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.
    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.
    
    FED MAY KEEP MARKETS VOLATILE
    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 beging 
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."
FILED UNDER: