— Adds Details, Background From 10th Paragraph

TOKYO (MNI) – A few Bank of Japan policy board members were worried
that deflation was spreading to many areas of the economy, with the pace
of a price recovery slower than expected, the minutes of the BOJ’s Feb.
17-18 policy-setting meeting released on Tuesday showed.

“Many members referred to the fact that the year-on-year decline in
the CPI for all items less energy and food accelerated in December 2009.
A few of these members, noting an increase in the number of items for
which prices had declines, said it was possible that price declines were
becoming widespread,” the minutes said.

“A few members said that recent movements in the CPI were slightly
weaker than expected in the interim assessment of January 2010. As
factors behind this, one member cited the possibility that the impact of
the output gap’s narrowing on prices was smaller than expected and that
medium- to long-term inflation expectations had declined as a result of
increased media report about deflation.”

The minutes also showed that the nine-member policy board (two
vacancies still unfilled) reached no consensus as to whether inflation
expectations among businesses and households had fallen.

“A different member argued that medium- to long-term inflation
expectations had not declined so far. Based on this discussion, members
shared the view that the developments in the CPI and medium- to
longer-term inflation expectations still demanded close monitoring,”
they said.

In line with the BOJ leadership’s repeated vow to maintain the very
accommodative monetary policy in order to fight stubborn deflation, the
board at the Feb. 17-18 meeting voted unanimously to leave the target
for the overnight lending rate among commercial banks unchanged at 0.1%,
which is considered the lowest possible level, without hurting market
functions.

The BOJ decided not to conduct further credit-easing at the
February meeting because the economic data released since the previous
meeting in January supported the BOJ’s view that Japan’s economy was
“picking up mainly due to various policy measures taken at home and
abroad.”

But the bank repeated its caution that “there is no yet sufficient
momentum to support a self-sustaining recovery in domestic private
demand.”

The economy is recovering gradually from the global recession but
the BOJ is facing an uphill battle to overcome continued price drops as
it has no effective tools to revive private demand directly. The root
cause of deflation lies in insufficient demand.

At the latest policy meeting on Mar. 17-18, the BOJ board decided
in a split vote to double the total sum of the super-low interest
lending facility launched in December to Y20 trillion in order to guide
longer-term borrowing costs for commercial banks lower and thus make the
BOJ’s policy stance of fighting deflation clearer.

The February minutes also showed that the board maintained its
cautiously optimistic outlook for Japan’s feeble recovery.

“With regard to the balance of risks, some members were of the view
that upside and downside risks were becoming balanced,” the minutes
said.

“A few members noted that there were considerable downside risks to
the economy. One of these members said that the economy would remain
highly vulnerable to negative shocks, particularly until around summer
2010, and this warranted attention,” they added.

This compared with the minutes of the Jan. 25-26 meeting that said,
in an update to the BOJ’s semi-annual medium-term outlook, “Many members
were of the view that, compared with the risk assessment presented in
the October 2009 Outlook Report, upside and downside risks had started
to become more balanced due to faster growth in emerging economies.”

hinoue@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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