MNI POLICY: BOJ July Minutes: Debate on More Flexible Policy

     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.

     --ADOPTING FORWARD GUIDANCE

     * 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."

     --WIDER RATE MOVES

     * 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.

     --REVIEWING AGGRESSIVE EASING

     * 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.

     --SLOW PRICE RISE

     * 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

low.

     * 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: max.sato@marketnews.com

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