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Extends Lower With Bears In Charge

     TOKYO (MNI) - Bank of Japan board members debated the pros and cons of
making the bank's interest rate target and asset purchases more flexible while
agreeing that prices face continued downside risks, according to the minutes of
the July 30-31 meeting released Tuesday.
     At its July meeting, the BOJ board decided in a 7-to-2 vote to make its
long-term interest rate target and asset purchases more "flexible," allowing the
nearly flat Japanese government bond yield to steepen slightly in line with
firmer growth and inflation.
     The bank "strengthened" the framework, allowing a wider trading range of
+0.2% to -0.2% for the 10-year Japanese government bond yield, double the
previous, unofficial range of +0.1% to -0.1%.
     The BOJ adopted "forward guidance" for the policy rates to show that it is
"strengthening its commitment" to guiding low inflation to its stable 2% target.
This should help the bank "persistently continue" aggressive monetary easing as
the stubborn deflationary mindset lingers among businesses and households.
     The key points from the minutes.
     * A few members pointed out that it was appropriate for the BOJ to
introduce forward guidance and strengthen its commitment to achieving the price
stability target when the projected rates of increase in the CPI turned out to
be lower compared to the previous projections.
     * Meanwhile, one member -- noting that it was questionable whether a
commitment by the BOJ solely to continue with the low interest rate policy would
have an effect beyond merely confirming its current policy stance -- said it was
"more important to design forward guidance to stimulate aggregate demand and
inflation expectations so that monetary easing would not become prolonged."
     * Some members said when continuing further with monetary easing, it was
necessary to "establish a framework that could function in a competent manner"
even under prolonged easing; for example, by conducting market operations and
asset purchases "in a more flexible manner."
     * One member noted that even if interest rates were to rise somewhat from
the current level, the effects of the rise on growth and inflation were likely
to be limited, while such a rise was likely to be effective in alleviating the
cumulative impact on the functioning of financial intermediation and enhancing
the sustainability of the bank's policy. The member said it was appropriate for
the Bank to allow the long-term yields to move upward and downward by around
0.25 percentage point.
     * A different member said it was appropriate to bear in mind that the
long-term yields might move upward and downward at about double the range of
around plus or minus 0.1 percent point since the introduction of yield curve
control in , while using these rates as a basis. In.
     * One member said that at this point, when longer-term inflation
expectations were weak, making policy adjustments that could allow the long-term
yields to rise "might lead to an increase in real interest rates and thereby
contribute to sluggish inflation."
     * A different member commented that, among market participants who desired
a rise in long-term interest rates, there were those who expected that only the
rates on investment would increase without any changes in foreign exchange rates
as well as prices of stocks and bonds, or a decline in firms' willingness to
borrow; however, this would not happen when considering the economy as a whole.
     * One member said that reducing the size of the Policy-Rate Balance in
current accounts held by financial institutions at the BOJ -- from the current
level of about Y10 trillion -- would be an option, as it had been becoming clear
from developments since the introduction of the negative interest rate policy
that the current size of the Policy-Rate Balance was not necessary in
maintaining interest rates in the money market at around the current levels.
     * Some members suggested that, with regard to purchases of exchange-traded
funds (ETFs) and Japan real estate investment trusts (J-REITs), the BOJ could
conduct purchases "with more flexibility" at its current pace, thereby enhancing
the sustainability of its monetary policy. One member pointed out that there
also was room to revise the purchase amount of each ETF with a view to
facilitating the bank's smooth purchases.
     * Most members predicted that the annual inflation rate was likely to
increase gradually toward the bank's 2% target as firms' stances gradually would
shift toward further raising wages and prices and as longer-term inflation
expectations were projected to rise gradually. These members, however, agreed
that it would take more time than expected to achieve 2% inflation.
     * One member -- noting that the output gap was less likely to continue to
widen within positive territory, and that inflation expectations continued to
show relatively weak developments -- said that, therefore, under the current
policy, the possibility of the inflation rate increasing gradually toward 2% was
     * Another member noted that, while the Outlook Report explained that prices
were determined by macroeconomic factors, such as the output gap and longer-term
inflation expectations, there were still explanations of prices among the public
that were based on the impact of individual prices and on sectoral shocks, such
as the expansion of online shopping.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: