TOKYO (Reuters) - Europe’s simmering debt crisis had made some Bank of Japan policymakers worried enough in May to signal readiness to ease monetary policy again should risks to Japan’s economy heighten, minutes of the central bank’s meeting last month showed.
Governor Masaaki Shirakawa on Wednesday also warned in a speech that the euro zone crisis was a primary risk to the world economy as Greece and Spain face the tough challenge of tackling a faltering economy and fiscal reform at the same time.
In the May meeting, a few board members also worried about growth in China, saying that any clear slowdown in Japan’s biggest export destination could force the BOJ to alter its view that Japan’s economy will resume a moderate recovery.
In the May meeting, the BOJ stood pat on monetary policy after having eased in April via an increase in an asset-buying program, under which it buys assets ranging from government bonds to private debt in an effort to reinflate the economy.
While the board agreed that it needed to still assess the effect of the April action on the economy, some members said the central bank must be ready to act if developments in Europe deteriorate and threaten Japan’s recovery.
“A few members raised the possibility that Japan’s economy would be adversely affected if substantial risks stemming from Europe’s debt problem materialized,” according to the minutes of the May 22-23 meeting released on Wednesday.
“These members said the BOJ should, therefore, stand ready to take appropriate actions without ruling out any options in advance.”
The BOJ held off on increasing the size of its 40-trillion-yen ($506 billion) asset buying program last week, saving its firepower in case Europe’s debt crisis triggered a spike in the safe-haven yen.
Shirakawa signaled that the central bank remains on alert.
“Major turmoil has been avoided following the outcome of the Greek election last weekend but Greece is pressed to implement fiscal and structural reforms while the economy slumps sharply,” he said in a speech at a gathering of “shinkin” credit union banks.
“There is no change in the severe conditions facing Greece. As for Spain, its fiscal and financial systems and the real economy are negatively affecting one another. We’re on a continued watch.”
Some analysts expect the central bank to ease policy in July, when it issues revised long-term economic and price forecasts that may show a sustained end to deflation is still distant.
One board member, presumably Shirakawa, said at the May meeting structural problems were partly behind deflation and that it takes a long time for the effect of monetary policy to show on the economy, signaling the BOJ had done enough for now.
But others appeared more eager to offer further monetary stimulus with some voicing concern about slowing demand in China, as well as the effect a strong yen and falling share prices could have on business spending.
“Some members said that if Chinese growth were to decelerate noticeably ... it would affect the BOJ’s (long-term) economic outlook presented in the April semiannual report, which is based on the assumption that overseas growth will accelerate,” the minutes showed.
Doubts about the European Union’s ability to contain its debt crisis have jolted financial markets, driving up the yen on safe-haven demand to the dismay of Japanese policymakers worried about the effect on exports.
A narrow victory for the conservative New Democracy party in the Greek election on Sunday eased concerns that Greece could exit the euro zone soon. But it did little to calm financial markets, which fear a euro zone breakup has only been delayed and will drag Spain and Italy into the maelstrom.
The BOJ set a 1 percent inflation target and boosted asset purchases in February in a show of its determination to beat deflation. It followed up with another increase in asset purchases in April but has stood pat on policy since then.
($1 = 79.0300 Japanese yen)
Additional reporting by Rie Ishiguro; Writing by Edmund Klamann; Editing by Eric Meijer and Jacqueline Wong