BOJ Minutes Spotlight Fears Of Direct Bond Underwriring
TOKYO (Nikkei)--The minutes of the Bank of Japan's Sept. 21 monetary policy meeting, released Monday, underscore the fear inside the BOJ's policy-setting board that a shift to a quantitative monetary easing would lead to direct underwriting of government bonds by the central bank.
The minutes provide key insights into the nine-member board's thinking when the central bank was under mounting political pressure to pump up its supply of funds to the money markets in order to contain a rising yen and ease upward pressures on long-term interest rates.
The board voted to stand pat on its near-zero interest rate policy by a margin of 7-2, in large part because of concerns about the negative side effects of a quantitative easing.
Yet the minutes also show that the groundwork was being laid for a subsequent shift of course executed by the BOJ, in which the central bank is stressing its "consideration to developments in financial markets" -- such as the strength of the yen -- and the board adopted on Oct. 13 measures aimed at ensuring that the impact of easing permeates through the economy.
At the Sept. 21 meeting, the board zeroed in on whether expanding the BOJ's injections of liquidity would have a positive impact on asset prices or economic activity. According to the minutes, "many members" felt that pumping more funds into the money markets would have no real effect.
One member outlined a theoretical argument that the BOJ would have to purchase long-term assets -- possibly Japanese government bonds -- for injecting additional funds under the zero interest rate policy to work. But the same member warned that "such measures would entail extraordinarily large negative outcomes."
Nobuyuki Nakahara, however, proposed adopting a quantitative easing accompanied by an inflation target, arguing that "the effects of the zero interest rate policy had played themselves out." Monetary base targeting with an inflation target would be an "effective countermeasure" against pressures on the BOJ to underwrite Japanese government bonds, he said.
Nakahara's proposal was ultimately voted down 8-1. Other members countered that a quantitative target would "inevitably lead to the underwriting of JGBs or their outright purchases, both of which involved extremely large risks."
(The Nihon Keizai Shimbun Tuesday morning edition)