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