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TOKYO (MNI) – A few Bank of Japan board members said at the October
27 board meeting that increasing outright Japanese government bonds with
a remaining life of two years is effective in stabilizing foreign
exchange rates, the minutes released by the BOJ on Monday showed.

Many board members still didn’t see the need to buy longer-term
JGBs, although private economists and some lawmakers called on the BOJ
to do so.

“A few members commented that the purchases of JGBs with a
remaining maturity of one to two years was also effective in terms of
ensuring stability in the foreign exchange market, considering the
current situation where the correlation of the yen-dollar exchange rate
with the two-year interest rate differential between Japan and the
United States was high relative to its correlation with the interest
rate differential of other maturities,” the minutes showed.

BOJ staff, according to the minutes, explained to the board
members, “With regard to market developments, although room for a
further decline in yields on T-bills was limited, there was still some
room left for a decline in yields on JGBs with a remaining maturity of
about one to two years.”

The BOJ’s policy board voted unanimously on Oct. 27 to continue the
bank’s very stimulative, practically zero interest rate policy by
maintaining the target for the overnight call loan rate among commercial
banks at zero to 0.1%, as widely expected.

But the board decided, by an 8-to-1 vote, to expand its
asset-buying program to Y55 trillion from the current Y50 trillion to
support Japan’s export-led economic recovery amid growing downside
risks.

Board member Ryuzo Miyao, a former economics professor, voted
against the Y5 trillion increase in the asset-buying program, proposing
instead a Y10 trillion rise to Y60 trillion.

Miyao, according to the meeting minutes, said, “downside risks to
economic activity and prices for the projection period were increasing
with the decline in firms’ and households’ inflation and growth
expectations, the amount of increase in the (asset-buying) program
should be significant – namely, about Y10 trillion – akin to the August
decision.”

Under the enhanced program, the BOJ will boost its purchases of
long-term Japanese government bonds to Y9 trillion from Y4 trillion.

The increase in the asset-buying program was the first since Aug.
4, when the BOJ raised its scale to Y50 trillion from Y40 trillion in a
bid to alleviate the adverse effects of the strong yen and heightened
uncertainty over the global economy.

Many board members judged that it was appropriate for the BOJ to
increase the size of the asset-buying program by Y5 trillion to Y55
trillion as the BOJ had just increased the fund by Y10 trillion to Y50
trillion in August, taking full account in advance of various potential
downside risks to the economy.

On this point, one member (probably Miyao) said, “the amount of
increase in the program should be of enough size – namely, about Y10
trillion – to have a notable impact akin to the August decision to
enhance monetary easing.”

As for global economic moves, “Members shared the view that the
euro area economy had shown clear signs of deceleration in growth, as
household and business sentiment had deteriorated reflecting growing
concerns about financial system stability triggered by the sovereign
debt problems,”

“Members concurred that there was high uncertainty regarding the
possible outcome of the sovereign debt problems in Europe, including its
impact on the global economy,” the minutes showed.

“They shared the view that, if global investors’ risk-averse
behavior further intensified in financial and foreign exchange markets,
thereby resulting in further appreciation of the yen and a stock price
fall, such events could cause Japan’s growth outlook to deviate
downwardly partly through a deterioration in business and household
sentiment,” they also showed.

As for the downside risks facing Japan, “One member said that
attention should be paid to the risk that inflation and growth
expectations would not rise if the expected timing of an exit from
deflation were to be pushed further back, thereby causing the private
sector to postpone spending.”

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

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