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TOKYO (MNI) – Bank of Japan board members warned that strains in
global financial markets fueled by sovereign debt problems in Europe
will be prolonged and could tip the global economy into recession, the
minutes of the BOJ’s Dec. 20-21 policy meeting showed Friday.

“Members shared the view that financial markets were likely to
remain under strain for a protracted period since there was no immediate
remedy to the sovereign debt problems in Europe,” the minutes showed.

They also said, “Some members said that, given that the presence of
European financial institutions in emerging economies were not small,
the effects on emerging economies of a possible acceleration in the
reduction of their assets were highly uncertain and therefore should be
monitored carefully.”

The BOJ board members also expressed concern over the prospects for
the global economy.

“They continued that it was therefore necessary to continue to pay
due attention to future developments because a further economic downturn
in Europe could trigger a global economic downturn,” they said.

The BOJ’s policy board at the December meeting voted unanimously to
continue the bank’s very stimulative, practically zero interest rate
policy while lowering its economic assessment, both as widely expected.

The BOJ has maintained the target for the overnight lending rate
among commercial banks at zero to 0.1% since October, 2010, when it
lowered it from around 0.1%.

But the nine-member board revised down its December economic
assessment from November, saying, “The pickup in Japan’s economic
activity has paused, mainly due to the effects of a slowdown in overseas
economies and of the appreciation of the yen.”

The minutes also showed, “Some members said that, given the close
relations between the United States and Europe on the financial side, it
should be borne in mind that the effects of the worsening of the
sovereign debt problems in Europe would likely spread to the U.S.
financial system.”

As for risks to the outlook for Japan’s economy, “Some members said
that, coupled with the effects of the appreciation of the yen, if
overseas economies were to weaken further, it was more likely that
Japan’s exports would start declining as a trend and domestic demand –
such as business fixed investment – would weaken, mainly reflecting a
fall in stock prices and a deterioration in sentiment.”

With regard to assessment of emerging economies as a main engine of
global economic growth, a few board members said, “the situation
differed by economy and it was therefore difficult to make an overall
assessment of developments in emerging and commodity-exporting
economies.”

“Members shared the view that a sharp economic deceleration was
likely to be avoided in emerging and commodity-exporting economies since
room for implementing policy actions was not limited on the monetary and
fiscal sides, but that there remained a high degree of uncertainty about
whether price stability and economic growth could be realized at the
same time in these economies,” the minutes showed.

On monetary policy, “some members expressed the view that the
repeated expansions made to the total size of the Asset Purchase Program
had been effective to a certain extent, as seen in the fact that
financial conditions in Japan continued to ease despite the persisting
heavy strains in global financial markets.”

A few members noted that “it was also important for the BOJ to
continue to make its utmost efforts to maintain financial markets
stability, bearing in mind the possibility of further disturbances in
financial markets due to the worsening of the sovereign debt problems in
Europe.”

But the minutes didn’t elaborate on how the BOJ would cope with
such an outcome. The BOJ’s next policy meeting is due on Feb 13 and 14.

tokyo@marketnews.com
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