The Bank of Japan Policy Board in February voted 8-1 to boost liquidity in the banking system by increasing the central bank’s outright purchases of government bonds, according to minutes released Tuesday.

During the Feb. 28 meeting, the Policy Board decided to increase the BOJ’s monthly purchases of outstanding long-term government bonds to 1 trillion yen from 800 billion yen.

The board also decided to provide funds on a flexible basis, regardless of its 10 trillion yen to 15 trillion yen target for the balance of current-account deposits held at the BOJ by commercial banks.

This constituted an effort to ensure stability in the financial markets toward the March 31 end of fiscal 2001, when settlement demands were expected to rise.

The Policy Board chose to keep the above target intact, although board member Nobuyuki Nakahara voted to raise it to some 20 trillion yen in order to allay a potential financial crisis in March, according to the minutes.

Much of the funds in the current accounts are obligatory reserves, which banks are required to hold at the BOJ against their commercial lending.

The reserves in current-account balances are generally used by banks, however, either directly for additional lending purposes or as leverage to boost lending.

Nakahara reportedly called on the BOJ to introduce an inflation target to curtail the current deflationary spiral. He suggested a target of consumer price hikes of between 1 percent and 3 percent by the October-December period of 2003.

The board voted 8-1 against the proposal, according to the minutes.

Nakahara also suggested that the central bank use foreign bonds to inject liquidity into the banking system, but the board again voted 8-1 against the recommendation.

The Policy Board also voted to ease the conditions for use of a standby “Lombard-type” lending facility introduced in March 2001. It opted to grant financial institutions unlimited use of the facility between March 1 and April 15 at the same rate as the official discount rate.

The maximum amount of time that financial institutions could borrow from the lending facility had previously stood at five days.

Nakahara voted against the extension on the grounds that there was no need for the BOJ to apply the official discount rate to the Lombard facility on any business day as proposed, according to the minutes.

He also said that banks would increase their use of the facility in future and proposed that the BOJ only increase the limit to 10 business days.

The board voted 8-1 against this proposal, according to the minutes.

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