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REPEAT: BOJ 2007 Minutes Show Importance of Dissenting Voices

--Repeating Story Published at 1037 JST (2137 ET Sunday)
By Max Sato
     TOKYO (MNI) - A decade after a Bank of Japan deputy governor made a rare
move to single-handedly vote against a rate hike, the central bank faces the
issue of whether it can make sound policy decisions when dissenting voices are
gone.
     Kazumasa Iwata, who was one of the two deputy governors from 2003 to 2008,
accurately predicted a slight negative consumer inflation pattern at the bank's
Feb. 20-21, 2007 meeting.
     He argued that "the weakness in wages and consumer spending has not been
shaken off" and that "production, particularly in the information technology
sector, has the possibility of leveling off."
     "The uncertainty over the price increase outlook is very strong," he said,
according to the full minutes of the meeting released Monday.
     Iwata was a government economist and a senior policymaker at the Cabinet
Office before joining the BOJ's nine-member board. He is currently the president
of the Japan Center for Economic Research.
     "When nominal wages are not showing stable year-on-year gains, it is hard
to see a mechanism of prices rising in a stable manner," he said. "In the next
six months through September (2007), I think it is highly likely that prices
will be zero or slightly negative."
     The core consumer price index, which excludes volatile fresh food prices
but includes energy costs, posted a slight gain on year at the end of 2006.
However, the key indicator was unchanged in January 2007 and posted slight
year-on-year drops for the next eight months.
     As a result, the core CPI was flat in calendar 2007 after rising 0.1% in
2006, which was the first rise in eight years. In light of a surge in global
crude oil prices, the core CPI jumped 1.5% in 2008 but slumped 1.3% in 2009 as
the base-year effect of the spike in gasoline prices faded. The core reading
continued to fall in the following three years.
     When the BOJ changed its policy framework to again target short-term
interest rates in March 2006, many BOJ officials believed the central bank
should be able to conduct four 0.25 percentage rate hikes in the coming few
years. The first rate hike under the new policy framework was decided in July
2006.
     Iwata pointed out that when the BOJ ended in March 2006 five years of
massive cash injections into financial under the quantitative easing policy,
both the core CPI and the core-core CPI (excluding both fresh food and energy)
were in positive territory.
     As of February 2007, the latest data showed the core CPI rose 0.1% on year
in December 2006 but the core-core CPI fell 0.2%, showing the slight price
increase was being supported by higher energy costs, not from more active
economic activity.
     "The credibility of central banks rests in always presenting analysis of
the current and future economic conditions, more accurately than any market
participants," he told his fellow board members.
     "We were right about lifting the quantitative easing and ending the zero
interest rate. But this time, I'm sorry but data are not fully supporting (a
move to raise the overnight interest rate)."
     Quoting the then Bank of England Governor Mervyn King, Iwata said central
banks must present two types of information: a clear objective and economic
analysis. He said the BOJ should make clearer its objective of seeking inflation
in a range of zero to 2%.
     The third point King made was central banks must not give markets
information about whether they will raise or lower interest rates at the next
meeting, Iwata said.
     "Unfortunately the media only seek the third type of information, which we
must not communicate, and pay little attention to the first two," Iwata said. "I
think it would be very unfortunate if anybody on this board were providing only
the third type of information."
     MNI's investigation a few years after the February 2007 meeting showed that
Iwata was uncharacteristically furious about what he believed was a clear leak
to the media from within the BOJ policymakers as to what the board was likely to
decide at the Jan. 17-18, 2007 meeting.
     Three board members called for raising the short-term interest rate in
January, which was voted down by the rest of the board. There were conflicting
media reports leading up to the meeting.
     At the Feb. 20-21, 2007 meeting, the BOJ decided in an 8 to 1 vote to raise
the target for the overnight rate to 0.5% from 0.25%. Iwata made a rare move to
go against then governor Toshihiko Fukui, even though he was part of the
leadership.
     In 2008, the BOJ under then governor Masaaki Shirakawa faced difficult
decisions to support the economy with a limited scope for rate cuts. It
responded to the global financial crisis by lowering the overnight rate target
to 0.3% in October and to 0.1% in December that year. In October 2010, the BOJ
lowered the overnight rate target to a range of zero to 0.1% and set up a fund
to boost asset purchases.
     Last week, the Bank of Japan's two new board members - Hitoshi Suzuki and
Goshi Kataoka - began their five-year terms, replacing the last remaining
dissenting voices on the central bank's policymaking panel.
     That means a tighter grip on monetary policy by Prime Minister Shinzo Abe,
who was returned to power in late 2012 with an election campaign promising to
overcome deflation and revitalize the economy.
     Unfortunately, the BOJ's 2% inflation target, which was advocated by Abe,
has not been met. Households are concerned about slow wage growth amid the
recent rise in the cost of living, and firms are cautious about raising prices
for fear of losing market share or denting consumption.
     Suzuki, aged 63, a commercial banker from the Bank of Tokyo-Mitsubishi UFJ
and Kataoka, 44, formerly an economist at Mitsubishi UFJ Research and
Consulting, are expected to support the reflationary policy stance of BOJ
Governor Haruhiko Kuroda.
     The two new board members are likely to support him in maintaining monetary
stimulus through yield curve control. The policy board is set to deliver
unanimous votes - something that has become rare in recent years.
     At a news conference Tuesday, Suzuki and Kataoka said they are fully
committed to achieving what many analysts see as an increasingly elusive 2%
inflation target, warning that it is premature to discuss how the bank might
eventually unwind its aggressive easing policy.
     The two newcomers replace Takehiro Sato, 55, and Takahide Kiuchi, 53, both
former private-sector economists, who were well-known skeptics of aggressive
monetary easing. They maintained their opposition to the yield curve control
policy target and the large scale of some of the bank's asset purchases, citing
the side effects on financial intermediation.
     The nine-member BOJ policymaking panel adopted an explicit 2% inflation
target in January 2013 under political pressure and began aggressive monetary
easing three months later under the then new and reflationary-minded Governor
Kuroda.
     At its latest policy meeting on July 19-20, the BOJ board decided to leave
its monetary policy unchanged in a seven-to-two vote, retaining the yield curve
control target it adopted in September last year, while pushing back its
estimate for achieving its 2% inflation target by a year until "around fiscal
2019." It was the sixth delay since April 2013 when the bank launched aggressive
easing.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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