Members of the Bank of Japan Policy Board indicated during their September meeting that the central bank needs to reduce financial institutions’ exposure to the stock market, according to minutes of the meeting released Tuesday.

One member went so far as to say the BOJ should stabilize the financial system “even if these measures cause a certain degree of risk to the central bank,” the minutes say.

According to the minutes, the members “pointed out that one of the reasons why Japan needs to be more cautious than other countries about the effects of stock price falls on the economy is that Japanese financial institutions hold a large amount of stocks and thus the financial system is vulnerable to stock price volatility.”

After World War II, Japanese banks and their borrowers began cementing long-term relationships by buying each other’s shares. The practice enabled Japan’s export juggernaut to take hold, but since the economy imploded in the early 1990s, those cross-held shares have been losing value at an accelerating clip and now threaten to undermine the banking system.

“It is essential to reduce the risk exposure of financial institutions arising from stock price volatility, which in turn would establish a financial environment where they could increase their lending,” the minutes say.

Although the nine-member Policy Board voted to maintain its ultraeasy monetary policy, the central bank also agreed to consider directly buying shares from more than a dozen Japanese banks to shield them from latent losses, at a regular meeting after the panel’s policy meeting.

The panel, however, agreed it was inappropriate for the BOJ to deliberately meddle with the market, saying, “It is virtually impossible for the central bank to make the massive share purchases necessary to artificially control prices in a globally linked market,” the minutes say.

One member said, “It was neither appropriate nor possible for a central bank to control stock prices by means of monetary policy, given that stock prices were a reflection of market participants’ view of the outlook for corporate profits.”

Some members, however, advocated that the BOJ and the government collaborate on effective and comprehensive measures to stabilize the financial system.

A few said that ensuring the stability of the financial system is essential to bringing about strong monetary easing effects, the minutes say.

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