Two Bank of Japan Policy Board members opposed pre-emptively raising the bank’s liquidity target during a meeting in May, saying it could impair communications between the central bank and financial markets, according to minutes released Monday.
At the end of the two-day meeting that ended May 20, the board decided in a majority vote to raise the outstanding balance of deposits at current accounts held by private financial institutions at the BOJ to between 27 trillion yen and 30 trillion yen from between 22 trillion yen and 27 trillion yen.
The additional credit-easing step was intended to ensure financial market stability in the wake of the government’s decision May 17 to inject additional public funds into Resona Bank to shore up its weak financial base.
Seven of the nine Policy Board members, including Gov. Toshihiko Fukui and deputy governors Toshiro Muto and Kazumasa Iwata, voted to raise the liquidity target. Board members Teizo Taya and Miyako Suda voted against it, the minutes show.
According to the minutes, Taya and Suda opposed the proposal for three reasons.
“First, there is no sign of instability in the money market,” Taya was quoted as saying. “Second, even if liquidity demand were to surge in the near future, it is difficult to judge the size of such demand at this stage.
“And third, there is a risk that the bank’s communication with the market might become difficult if the bank raises the target pre-emptively when no increase in liquidity demand has occurred.”
Suda gave the same reasons for opposing the proposal. Those who supported increasing the liquidity target said raising it “would contribute to soothing public anxiety over the problem of Resona Bank by clearly indicating the bank’s firm stance of securing financial market stability and give the public confidence in Japan’s economic and financial prospects,” the minutes show.
They also said demand for liquidity had already increased due to the Resona problem.
The minutes show a member proposed studying the introduction of “a numerical target for the inflation rate.”
That member suggested two possible policy measures to achieve such a target: increasing outright purchases of government bonds with options, thereby enabling holders to convert their bonds into inflation-indexed bonds, when the government starts issuing such bonds, and introducing outright purchases of foreign bonds.
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