Highlights 2-BOJ: Commodity price rise causing shocks to economy

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TOKYO, June 18 (Reuters) - Some Bank of Japan policy board members said rises in commodity prices were causing both demand and supply shocks to Japan's economy, minutes of the bank's May 19-20 meeting showed on Wednesday.

In the previous meeting on April 30, many members said that with the economy slowing the risks of accommodative monetary conditions causing sharp economic swings had decreased. But they said such risks could heighten again once economic uncertainties eased.

The BOJ board, which has only seven members due to two vacancies, voted unanimously to keep interest rates unchanged at both meetings and released its twice-yearly economic outlook report on April 30. It also kept rates on hold at a subsequent meeting that ended on June 13.

Following are key points from the minutes of the April 30 and May 19-20 meetings: (MAY 19-20 MEETING)

INFLATION

"Members agreed that global inflation risks were rising with crude oil and other commodity prices at high levels.

"Many members said recent rises in commodity prices were due not only to increased demand by emerging economies but also to various other factors such as supply constraints, heightening geopolitical risks, accommodative financial conditions and a 'flight to simplicity' (investors seeking less complex financial products) seen in markets ...

"Several members said it would be inappropriate to focus only on the supply shock, or the outflow of income from Japan caused by rising commodity prices, because it was happening in parallel with an increase in Japanese exports to emerging economies.

"One member said recent rises in commodity prices were causing both supply and demand shocks to Japan's economy, which were notably persistent.

"In textbook theory, there was no need for the BOJ to take policy action to absorb first-round effects of supply shocks unless they caused second-round effects through a change in inflation expectations. The effects of the shocks were so persistent and complex that they were making policy decisions difficult.

"Some members said economic fundamentals, namely high growth in emerging economies, were behind the recent rises in commodity prices. This had caused both a demand shock, through rising exports, and a supply shock, in the form of rising import prices, to Japan's economy.

"One member said rises in commodity prices led to changes in relative prices and adjustments in resource allocation. But they could also cause big swings in general prices, a factor that warrants attention in implementing monetary policy."

JAPAN ECONOMY

"Members shared the view that capital expenditure growth was slowing as rising energy and raw material prices were squeezing corporate revenues ...

"Many members said they were closely watching how capital spending plans would be revised in the upcoming BOJ tankan survey for June ...