BOJ policymakers at logger-heads addressing weak prices, rising stimulus cost

By Leika Kihara

TOKYO (Reuters) – Bank of Japan policymakers disagreed on how to address soft inflation and the rising cost of its ultra-easy policy, minutes of their June meeting showed, underscoring the challenge they face in achieving their elusive price target.

The minutes showed the BOJ board likely deliberated ways to make its massive stimulus program more sustainable as long ago as June, which led to its decision this week to make tweaks to its asset-buying and allow yields to rise more.

The minutes showed on Friday that some members saw it “necessary to continue to carefully examine the effects of the prolonged low-yield environment” on financial institutions’ profits.

“One member said it would likely take a certain amount of time to achieve the BOJ’s inflation target. This member maintained it was therefore necessary for the BOJ to persistently continue with powerful monetary easing in a sustainable manner,” according to the minutes.

The central bank does not identify the members in its minutes.

At the June meeting, the BOJ kept monetary policy steady and downgraded its assessment on inflation, reinforcing views Japan will lag well behind its U.S. and European peers in dialling back crisis-mode policies.

The minutes showed one member arguing that the BOJ should not try to forcibly push up demand via additional easing as doing so could create distortions in the economy that was already in good shape.

But another member said recent sluggish inflation had heightened the need to ramp up stimulus to achieve the BOJ’s 2 percent inflation target at the earliest date possible.

With inflation distant from its target, the BOJ has been forced to maintain its massive stimulus program even amid the rising cost of prolonged easing such as the hit to bank profits from near-zero rates.

“One member said the BOJ must consider countermeasures against the side effects of its policy before they materialized,” as some banks were suffering from low profits and unrealized losses on securities holdings, the minutes showed.

The board also discussed the need to address dwindling trade in Japan’s government bond market, as the central bank continued to gobble up huge amount of bonds to flood markets with cash.

“One member expressed the view that, when controlling the long-term yields, it was important to conduct market operations more flexibly with a view to maintaining the functioning of financial markets as much as possible,” it showed.

“In addition to analyzing recent price moves, the BOJ should examine and discuss at its July meeting the effect its continued powerful monetary easing is having on the Japanese government bond market,” the minutes quoted one member as saying.

At the subsequent meeting in July, the BOJ kept its yield targets steady but pledged for the first time to keep rates very low for an extended period. It also said it would allow bond yields to rise more and took steps that would give it space to slow its massive buying of government bonds and risky assets.

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