— Adds Details, Background From 8th Paragraph

TOKYO (MNI) – A few Bank of Japan board members emphasized the need
for the central bank to stand ready to take appropriate action without
ruling out any options if Japanese growth were to slow substantially,
according to the minutes of the June 14-15 policy setting meeting
released Wednesday.

“A few members raised the possibility that Japan’s economy would be
adversely affected through various channels if a substantial risk
materialized, stemming from the European debt problem, for example,” the
minutes stated.

“These members said that the BOJ should therefore stand ready to
take appropriate actions without ruling out any options in advance.”

However, the policymakers at the June meeting didn’t see an
imminent need to ease policy further as Japan’s economy continues were
seen moving in line with the recovery scenario presented by the BOJ in
April.

At the two-day meeting ended on June 15, the BOJ’s policy board
voted unanimously to maintain practically zero short-term interest rates
and left the scale of its financial asset-buying at Y70 trillion after
increasing it from Y65 trillion in April.

The BOJ has left its target for the overnight interest rate among
commercial banks at zero to 0.1% since October 2010, when it was lowered
from 0.1% as part of “comprehensive monetary easing.”

Despite growing concerns about the European financial system, the
BOJ policymakers believed that Japan’s economy will return to a
sustainable recovery path in the first half of the current fiscal year
(April-September).

At the June meeting policymakers discussed the drop in Japanese
long-term interest rates below 0.8%, attributing it to safe-haven flows.

“Many members expressed the view that this was attributable to the
increase in demand for JGBs that were regarded as safe assets,
reflecting concern over the European debt problems,” the minutes showed.

“A few of these members noted that demand for safe assets could
decline with progress in addressing the European debt problems, although
concern over the problems would not dissipate immediately,” they said.

“These members continued that, in such a case, long-term interest
rates in the United States, Germany, and Japan could rebound.”

As for Japan’s consumer prices, “Some members said that there was a
possibility that the rate of change in the CPI (all items less fresh
food) would be around 0% for a longer period than expected, partly
reflecting the recent decline in international commodity prices.”

This indicated that the BOJ had a more cautious view on the
prospects for Japan’s prices than before.

The BOJ had said that it was likely that the CPI rate would reach
the bank’s longer-term price stability goal of 1% annual inflation
relatively soon.

At the mid-June meeting, the BOJ was relatively optimistic about
the Chinese economy, a key export destination for Japanese companies.

“Members agreed that the (Chinese) economy was likely to gradually
show clear signs of recovery through the second half of 2012 on the back
of the implementation of a range of policy measures, although the timing
of such recovery was being delayed slightly.”

But there was continued concern about the impact of the Eurozone
debt crisis and economic slowdown on Japan and the rest of the world.

Many board members also pointed out “the risk that a weakening in
the euro area economy would exert downward pressure not only on economic
activity in countries that were largely dependent on exports to the euro
area — such as China — but also on Japan and other countries that were
indirectly linked with the euro area through exports and imports with
the former set of countries,” the minutes showed.

Board members agreed that the outlook for the Japanese economy was
critically dependent on domestic demand.

“Many members expressed the recognition that the key factor was
whether domestic demand would remain firm until a recovery in external
demand became evident.”

Some members worried that “the European debt problem was becoming
chronic and the effects of such a development tended to result in an
appreciation of the yen and a fall in stock prices, said that this might
negatively affect business and household sentiment, thereby exerting
downward pressure on business fixed investment and private consumption
in Japan.”

tokyo@marketnews.com
** MNI Tokyo Newsroom: 81-3-5403-4833 **

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