— Adds Details, Background From 9th Paragraph

TOKYO (MNI) – In order to head off the drag from a heightened
European debt crisis, some members on the Bank of Japan board stressed
the need for the BOJ to stand ready to take action without ruling out
any options, the minutes of the May 22-23 policy meeting released on
Wednesday showed.

“A few members raised the possibility that Japan’s economy would be
adversely affected if a substantial risk materialized, stemming from the
European debt problems,” the minutes said.

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

But the minutes also showed the board didn’t think it was necessary
to conduct further monetary easing in May after taking action in
February and April.

The board agreed that “it was appropriate to steadily implement the
purchases of financial assets under the program, which was expanded as a
result of the decision made at the April 27 meeting, and to monitor the
effects of these purchases.”

The BOJ board at the April 27 meeting decided to increase the scale
of the asset-buying program launched in October 2010 to Y70 trillion
from Y65 trillion.

At the May meeting, the board voted unanimously to maintain
practically zero short-term interest rates and left the scale of its
financial asset-buying program at Y70 trillion.

The BOJ has left its target for the overnight interest rate among
commercial banks at zero to 0.1% since October 2010, when it lowered it
from 0.1% as part of “comprehensive monetary easing.” The current range
is considered to be the lowest possible without hurting money market
functions.

The May minutes showed that some BOJ board members were worried
about the impact of slower economic growth in China, the largest market
for Japanese exports.

“Some members added that, if the pace of growth in the Chinese
economy were to decelerate noticeably as a result of, for example, the
decrease in exports to Europe, then this would affect the BOJ’s economic
outlook presented in the April 2012 Outlook for Economic Activity and
Prices,” the minutes said.

After the May 22-23 meeting, BOJ Governor Masaaki Shirakawa told
reporters that the economic slowdown in China is prolonged and the
European debt and political crisis remains the highest risk to Japan’s
recovery.

“One member expressed concern over the impact of the recent
appreciation of the yen and fall in stock prices — both stemming from
the European debt problem — on domestic business fixed investment,
mainly resulting from changes in business sentiment,” the minutes said.

“Some members, noting that long-term interest rates had declined
further, said that attention needed to be paid to a risk of an abrupt
jump in these rates, which could be triggered by future events.”

“One of these members commented that the effects of monetary easing
would be curtailed if a rise in longer-term interest rates adversely
affected the financial conditions of financial institutions,” they said.

As for the recent undersubscription to the BOJ’s outright JGB
buying operations, “Members shared the view that this indicated that the
effects of the BOJ’s powerful monetary easing had been permeating the
financial markets.”

“A few members added that undersubscription was expected to occur
if the BOJ conducted further large-scale asset purchases and provided a
large amount of funds.”

On May 16, the BOJ offered to buy Y600 billion of JGBs with a
remaining life of 1 to 2 years but demand for the operation fell short
of the offered amount (the BOJ bought only Y480.5 billion).

Many members at the May 22-23 meeting said it was necessary for the
BOJ section in charge of daily money market operations to find ways to
smoothly buy necessary financial assets, without elaborating, the
minutes showed.

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

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