–Adds More Details, Background From 9th Paragraph

TOKYO (MNI) – Many Bank of Japan board members said that the BOJ
needs to pay great attention to the risk factors that could worsen the
Japanese economy, minutes of the May 20-21 policy-setting meeting show.

“Many members said that the possibility was small at present that
the recovery in advanced economies would come to an end. These members
continued that close attention should be paid to the risk that
balance-sheet adjustments and events stemming from European countries’
fiscal conditions might adversely affect advanced economies through such
channels as financial markets and international trade,” the minutes

It also said, “A few members said that the key to the world economy
establishing a virtuous circle would start off with the rapid growth in
emerging economies and maintain a solid recovery in the U.S. and
Japanese economies, while containing the adverse effects from the
heightened uncertainty in European economies.”

The minutes also showed that many members emphasized the need for
the BOJ to pay attention to the risk that possible intensification of
the financial market strains — which could arise in the process of
fiscal consolidation and economic reforms in countries such as Greece —
might depress economic activity in the whole euro area through various

The BOJ said on May 21 that its policy board voted unanimously to
leave the target for the overnight lending rate among commercial banks
unchanged at 0.1%, the lowest possible rate without hurting market

The BOJ has maintained the target since December 2008, when it
lowered it from 0.3% at the height of the global financial crisis.

Meanwhile, the BOJ also unveiled the outline of its new lending
facilities that were decided at the April 30 policy meeting and is aimed
at increasing commercial banks’ incentives to extend loans to innovative
firms in growth sectors.

The central bank will extend one-year loans to private banks at the
overnight call rate, which is currently at 0.1%, and they can be rolled
over, it said in the Statement on Monetary Policy released after a
two-day policy-setting meeting.

As for the European financial turmoil, the minutes of the May 20-21
policy meeting also showed, “A few said that, if several European
countries conducted fiscal consolidation at the same time, the resultant
fiscal drag might be larger than expected.”

Meanwhile, some members said that such a result would be more than
offset by positive effects from a recovery in market confidence in
fiscal sustainability and consequent stabilization of financial markets.

It also noted, “Many members were of the view that European
financial markets had remained unstable, although strains stemming from
the Greek problem had eased somewhat as a result of a series of policy

Meanwhile, a few members expressed concern over the upside risks of
emerging countries.

“A few members said that, considering that some emerging economies
were increasingly showing signs of overheating, attention should be paid
to whether they were responding to the situation in a timely manner,”
the minutes said.

Regarding Japan’s price moves, the minutes showed that the board’s
concern over a worsening of deflation has somewhat eased.

“A few members pointed out that one-year-ahead inflation
expectations of households estimated by using the figures in the
Consumer Confidence Survey had recently been rising,” it said.

But other members referred to developments in import prices as a
risk factor for prices, and pointed to the need to closely monitor how
the heightened uncertainty in European economies would affect prices of
commodities such as crude oil and foreign exchange rates, and eventually
prices in Japan.

On the current climate, the BOJ upgraded its overall economic
assessment for May from the previous month, saying, “Japan’s economy is
“starting to recover moderately, induced by improvement in overseas
economic conditions.”

It noted that business investment is “showing signs of picking up,”
instead of its previous statement it was “leveling off.”

The BOJ also released the minutes of the May 10 extraordinary
policy-setting meeting when the board members voted to re-open its
temporary U.S. dollar swap agreement with the Federal Reserve and resume
injecting dollar liquidity into financial markets.

The minutes showed, “Japanese banks’ funding in foreign currencies
had not suffered any disruptions, and there had been no large impacts on
the funding by foreign banks in the Tokyo market.”

But it continued, “However, some financial institutions had become
less willing to invest in markets, and therefore, it was necessary to
monitor how the strains in global financial markets would affect the
Tokyo market.”

The May 10 decision was made at an extraordinary policy-setting
meeting hurriedly called on Monday morning amid international efforts to
contain the effects of the Greek debt crisis.

The BOJ also voted unanimously, as expected, to maintain the target
for the overnight lending rate among commercial banks at 0.1%, the
lowest possible level without hurting market functions, in order to
continue fighting deflation, at the meeting.

The BOJ followed the lead of other major central banks — the Bank
of Canada, the Bank of England, the European Central Bank, the Federal
Reserve, and the Swiss National Bank –in re-establishing temporary
U.S.-dollar liquidity swap facilities.

The BOJ said it took action “in view of recent liquidity pressure
in the international financial markets and the possible impact of those
on liquidity in the yen monetary market.”

The BOJ first adopted a funding arrangement with the U.S. Federal
Reserve in October 2008 to help revive interbank market liquidity at the
height of the global financial crisis. The BOJ’s temporary funding
operations in U.S. dollars at fixed interest rates were extended twice
but discontinued on Feb. 1, 2010.

** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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