Bank of Japan Gov. Masaru Hayami on Tuesday came out against a proposal that the central bank expand its buying of government bonds from the market, saying such a measure would be tantamount to underwriting newly issued bonds.

Hayami’s remarks before the House of Representatives Finance Committee came a day after Chief Cabinet Secretary Hiromu Nonaka expressed strong expectations of the central bank’s buying more government bonds to help stem the rise in long-term interest rates.

Under the proposal, which has been batted back-and-forth for a week now, the BOJ would absorb some of the excess supply of government bonds and keep them, in principle, until maturity.

Keeping the supply down would also keep the interest rate down. But the BOJ Policy Board is set to convene Friday to discuss the nation’s monetary policy, and the likelihood is growing that it will postpone any decision on the outright purchase proposal.

Hayami also said the present level of Japan’s key long-term interest rate is not too high. The rate has been fluctuating since December when the government announced it would be funding an expansionary fiscal 1999 budget with an enormous bond issue. At that point the rate was about 1.5 percent. It ended trading Tuesday at 1.985 percent, down from about 2.3 percent several days earlier.

Finance Minister Kiichi Miyazawa meanwhile remained neutral on the matter, reiterating that any decision to expand the purchase of bonds should be left to the central bank.

He also took a new tack by voicing support for a plan to boost the issuance of government bonds with varying maturity periods to help curb the growth in long-term interest rates.

Since the interest rate on 10-year government bonds is a benchmark for other rates, the government is fearful that its expansionary budget could prove counterproductive, that interest rates on home and business loans will also rise, thereby further injuring Japan’s Band-Aid economy.

Miyazawa has instructed ministry officials to consider diversifying the kinds of government bonds to be issued in fiscal 1999, which begins April 1.

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