UPDATE: BOJ Sep Minutes: Board Debates Easing Effect Under YYC

--Adds Details From 14th Paragraph

     TOKYO (MNI) - Most Bank of Japan board members agreed at their Sep. 20-21

meeting that the current easing stance under the yield curve control framework

should help the bank achieve its 2% inflation target while one member argued

that it is insufficient, the minutes of that policy meeting released Monday

show.

     The minutes also show most members were optimistic that a continued

tightening in the labor supply would prompt more firms to raise prices,

supporting the bank's efforts to guide inflation from under 1% now to a stable

2% sometime during fiscal 2019.

     One member, believed to be Goushi Kataoka, "argued that monetary easing

effects gained from the current yield curve were not enough for 2% inflation to

be achieved around fiscal 2019."

     The member argued that in a situation where it was likely that excess

capacity remained in capital stock and the labor market, and considering that a

consumption tax hike was scheduled in October 2019, a further increase in demand

was necessary to sufficiently raise prices.

     "... from the viewpoint of generating such an increase in demand, it was

questionable whether the current yield curve in real terms was sufficiently

accommodative relative to the natural yield curve," he added, according to the

minutes.

     At least one other BOJ board member disagreed with this position.

     "In response to this opinion, a different member expressed the view that

the level of the current yield curve in real terms was substantially below that

of the natural yield curve for all maturities, and was sufficiently

accommodative even compared with past monetary easing phases," the minutes said.

     Kataoka, a former economist at Mitsubishi UFJ Research and Consulting,

joined the BOJ board on July 24 but participated in his first policy meeting in

September.

     The board debated at length the effects of current policy and some of the

risks that it posed to the Japanese financial system.

     Some members noted recent remarks by BOJ Governor Haruhiko Kuroda that the

current framework "incorporated a mechanism in which the effects of

accommodative monetary policy would be further enhanced through a decline in

real interest rates and a rise in the natural rate of interest, with the economy

continuing to expand moderately and the inflation and potential growth rates

rising," according to the minutes.

     On the other hand, some members cautioned that the BOJ's aggressive easing

since April 2013 could have a negative effect on its goal by lowering profits

margins of lenders and killing the function of financial markets.

     Noting due attention should be paid to the impact of powerful monetary

easing on financial markets and financial institutions, those members "expressed

the recognition that it was necessary to avoid a situation in which the

functioning of financial intermediation was hampered and the timing of achieving

2% was delayed as a result."

     In July, the BOJ pushed back the timeframe for hitting the 2% inflation

target to "around fiscal 2019" from the previous estimate of "around fiscal

2018." It was the sixth delay since the bank began aggressive easing in April

2013.

     At its September and October meetings, the BOJ board decided in an 8-to-1

vote to maintain its current monetary easing stance under the yield curve

control framework it adopted in September last year. Kataoka dissented at both

meetings, although he didn't propose any specific policy action.

     Under the yield curve control framework, the BOJ is seeking to stabilize

the 10-year government bond yield, the benchmark for long-term borrowing costs,

at around zero percent and keep the overnight interest rate at -0.1%.

     At the September meeting, "most members shared the view that the

year-on-year rate of change in the CPI was likely to continue on an uptrend and

increase toward 2%, mainly on the back of the improvement in the output gap and

the rise in medium- to long-term inflation expectations."

     The board general optimism about current policy is due in part two skeptics

of the aggressive easing that has lasted for more than four years -- Takahide

Kiuchi and Takehiro Sato -- were replaced in July.  They continued to warn

side-effects of the easing until they left the BOJ on July 23 at the end of

their five-year terms.

     "Some members expressed the recognition that, in view of a further

tightening of labor market conditions going forward, it would become more

difficult for firms to absorb labor costs, and therefore moves to pass on these

costs to prices would spread gradually," the minutes said.

     One member projected that consumers' acceptance of a rise in prices would

gradually increase with the improvement in the employment and income situation

-- a view expressed by Kuroda in his recent public remarks.

     A few members pointed out that there had been a gradual but steady increase

recently in cases where firms made efforts to raise their prices and other firms

followed suit, mainly in labor-intensive sectors such as home delivery services,

eating and drinking services, and real estate lessors in city centers.

     "Many members expressed the recognition that labor-saving investment and a

streamlining of firms' business processes should be assessed as positive moves

that would lead to improving firms' productivity and raising the growth

potential of the economy as a whole," the minutes said.

     "These members then said that such efforts by firms would lead to

restraining prices temporarily, but in the somewhat longer term, they were

expected to exert upward pressure on prices through, for example, rises in

growth expectations."

     A few members pointed out that, in order to further raise people's growth

expectations, the government's growth strategy also was important.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

[TOPICS: MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$]