TOKYO Feb 19 A rift among Bank of Japan board
members over how to achieve the new 2 percent inflation target
means the central bank's next governor may have to move more
cautiously than markets expect in stimulating the economy.
Prime Minister Shinzo Abe has demanded bold action from the
BOJ, raising expectations the next governor will shake up policy
and finally manage what previous governors have not - to jump
start an economy that has stagnated for years.
But sources familiar with central bank thinking said that
while the central bank may well ease policy under an existing
asset-buying programme, fresh ideas to expand the balance sheet
more aggressively may be months away.
That's because the new governor will face the challenge of
trying to reach consensus on a board split over the feasibility
of seeking a 2 percent inflation target and how best to achieve
it, they said. They declined to be identified because of the
sensitivity of the issue.
Incumbent BOJ Governor Masaaki Shirakawa and his two
deputies step down on March 19. The BOJ will hold its first
policy meeting under a new leadership on April 3-4 if
parliamentary approval of Abe's nominees goes smoothly.
To keep easing policy, the meeting will have little choice
but to continue with the steps already adopted of boosting asset
purchases and buying government bonds, analysts said. Anything
more ambitious is unlikely.
"What we have now is a very fragmented board, confused on
what the BOJ is really trying to achieve. Reaching a consensus
will be tough," said Hideo Kumano, chief economist at Dai-ichi
Life Research Institute in Tokyo.
Under pressure from Abe, the central bank agreed in January
to double its inflation target to 2 percent and committed to
"open ended" asset buying from 2014.
His persistent pressure to shift the central bank to more
aggressive action has driven the yen down to a 33-month low
against the dollar, lifted share prices and given the
export-reliant economy hope of relief from the fourth recession
The BOJ board will be dominated by those in favour of
further easing but that is about where consensus ends.
It is split on everything else, including the feasibility of
trying to achieve 2 percent inflation in an economy that has
rarely seen prices rise to that level, except for blips caused
by tax hikes or a spike in energy costs.
Board members Takehiro Sato and Takahide Kiuchi voted
against the BOJ's decision in January to double the inflation
target. They felt 2 percent inflation was not sustainable in
Japan, minutes of the meeting released on Tuesday show.
"Even if the central bank were to set 2 percent inflation as
a target, this alone was highly unlikely to have a substantial
influence on inflation expectations," they were quoted as saying
in the minutes.
That contrasted with the BOJ's official line that by setting
a new inflation target, the central bank could show its resolve
to beat deflation and alter public expectations that prices will
continue to fall.
The two dissenters are not necessarily opposed to further
easing. They voted with the board at the same January meeting on
the decision to make an "open-ended" commitment to buy assets
from next year.
But there is hardly any consensus on how the BOJ should try
to beat deflation, which has weighed on the economy for so long
that consumer expectations of falling prices are entrenched.
Some board members want the BOJ to focus on nudging down
longer-term interest rates by buying longer-dated government
bonds, the sources say. A reduction in longer-term interest
rates might encourage longer-term lending and thus investment in
the economy, the thinking goes.
Others prefer scrapping a 0.1 percent floor set by the
central bank on money market rates, or want the central bank to
buy treasury discount bills forcefully. Both measures would be
aimed at pushing down short-term rates and to help weaken the
Policymaker Ryuzo Miyao, a former academic, proposed
strengthening the BOJ's commitment to ultra-easy monetary policy
by pledging to keep interest rates virtually at zero until 2
percent inflation is in sight. That would be more binding than
the BOJ's current commitment to maintain zero rates and asset
purchases "for as long as needed."
Miyao's idea was turned down at a policy review last week.
The more unorthodox step of buying foreign bonds is fading
as a near-term possibility as Japan faces heat from fellow
members of the Group of 20 leading economies.
The fall in the yen has already sparked concern Japan's
policies could encourage competitive currency devaluations,
although the G20 refrained from directly criticising Japan at a
financial leaders' meeting last weekend.
Even Sato, initially an advocate of buying foreign bonds,
has toned down his calls and stressed the hurdles that must be
met, such as seeking global consent for such a step. Foreign
bond buying is considered a more radical option for the central
bank because it would be seen as tantamount to currency
"Given the global debate surrounding Japan, it may be hard
for the BOJ to consider buying foreign bonds," said one source.
So while the BOJ may well ease policy as early as in April,
it is likely to opt for another increase in its asset-buying
programme, rather than a new measure, analysts say.
Indeed, the sources said that given the board split, new
ideas for policies may be months away.
The BOJ might also extend the duration of government bonds
it targets under its asset-buying programme to five years from
the current three years, an option floated by a few board
members in January as a way to pressure the longer end of the
For the time being, the only realistic option left for the
central bank may be to continue buying government bonds, said
one of the sources.
"The only question is how aggressively it will do this."