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Sakuya Fujiwara, former deputy governor of the Bank of Japan, says BOJ Gov. Toshihiko Fukui is constantly under public pressure over the central bank’s monetary measures.

“Fukui is doing his best under the restrictions of the zero-interest-rate policy,” said Fujiwara, who served as deputy governor between 1998 and 2003 and is now president of Hitachi Research Institute.

Saturday marks the first anniversary of Fukui’s governorship. The 40-year BOJ veteran had stepped down as deputy governor in 1998 to take the blame for a series of bribery scandals involving BOJ officials.

BOJ watchers have praised him for devising new monetary measures to try to tackle deflation. But they said Fukui’s real test will come when it comes time for the central bank to consider ending its zero-interest-rate policy.

The policy, introduced by former BOJ Gov. Masaru Hayami in February 1999, leaves little room to cut rates or conduct high-impact monetary measures.

The BOJ under Fukui has instead focused on injecting additional liquidity into markets to shore up the economy.

Since Fukui took the helm, the BOJ has repeatedly increased the target for the outstanding balance of deposits in the current accounts held by private financial institutions at the central bank. The target is now between 30 trillion yen and 35 trillion yen, up from a range of 15 trillion yen to 20 trillion yen when Fukui took office.

The BOJ decided in June to buy asset-backed securities, including asset-backed commercial paper, from financial markets to make it easier for small and midsize companies to raise funds.

It was the first time the bank had purchased private, risk-bearing securities. Previously, the central bank had mainly bought government bonds to pump liquidity into the financial markets and prevent its finances from deteriorating.

Masaaki Kanno, a former BOJ official and chief economist at J.P. Morgan Securities Asia Pte. Ltd., welcomed Fukui’s attempt to take the new measures.

Although the effects of the measures are difficult to gauge, they have helped slow deflation, he said.

“The measures Fukui took are different from the central bank’s traditional monetary policy,” Kanno said. “Fukui had no choice but to change the BOJ’s traditional stance under the restrictions of the zero-interest policy.”

The BOJ under Fukui has also taken a different stance toward the government.

Unlike former BOJ Gov. Hayami, who distanced himself from the government, the BOJ has in the past year coordinated its monetary policy with the state, said Ryutaro Kono, chief economist at BNP Paribas Securities (Japan) Ltd.

Kono cited as an example the time on Jan. 20 when the BOJ made a surprise decision to further increase the target of the outstanding balance of deposits in the current accounts at the central bank.

The measure, apparently to help the economic recovery, was also aimed at financially supporting the government’s intervention in the currency market to stop the yen’s rise against the dollar, he said.

The BOJ should maintain its independence from politics because politicians will try to get the central bank to lower interest rates to vitalize the economy without considering the chances of inflation, Kono said.

The BOJ is able to avoid this risk at present because it has no room for rate cuts, he said. “The BOJ’s stance on coordinating monetary measures with the government’s economic policy is acceptable as a way to revitalize the economy,” he claimed.

BOJ watchers say Fukui will be forced to make more difficult choices as his term progresses.

Mitsuhiro Fukao, a former BOJ official and professor at Keio University, said if deflation worsens, the BOJ would have a hard time hammering out new monetary measures.

But Fukui’s real challenge will come when he has to decide to end the current ultra-easy monetary policy after the economy picks up.

Japan’s economy is showing signs of recovery. Real gross domestic product posted the steepest gain in the October-December period in more than 13 years.

The government will probably protest if the BOJ tries to raise interest rates because it wants to keep down yield payments on government bonds, Fukao said.

The issuance of government bonds is expected to reach some 600 trillion yen by the end of this month, about 7.5 times larger than the nation’s general accounts for fiscal 2004, the Finance Ministry said. The government plans to issue government bonds totaling 162 trillion yen during fiscal 2004. “Fukui has yet to face a significant challenge in making a BOJ policy decision,” Fukao said.

BOJ members fretted

Kyodo News Some members of the Bank of Japan Policy Board expressed concerns at a Feb. 4-5 meeting that there were nervous movements in the currency market and that the dollar might depreciate further, according to the meeting’s minutes released Friday.

“Some members added that financial markets were stable recently, but there were nervous developments, mainly in the foreign-exchange market,” the minutes said.

The BOJ minutes said some board members expressed the view that there were still “strong market expectations” that the dollar would depreciate due partly to concerns about the “twin deficits” — the budget and trade deficits of the United States — and geopolitical risks.

“Therefore, the outlook and the effects on corporate sentiment and economic activity, especially exports, continued to require close monitoring,” the minutes said.

At the time of the meeting, the dollar was trading between 105 yen and 107 yen.

Regarding the U.S. twin deficits, many board members said that, coupled with increasing concerns about geopolitical risks and the resulting changes in international capital flows, the deficits continue to be major risk factors for the U.S. and world economies.

Key events during Fukui’s tenure

The following is a chronology of the Bank of Japan’s policy actions and financial events since BOJ Gov. Toshihiko Fukui took office on March 20, 2003:

March 20, 2003: A new BOJ leadership team led by Fukui is launched.

March 25: The BOJ holds its first extraordinary policy meeting under the revised BOJ Law, taking action to cushion the impact of the war in Iraq. The BOJ raises the limit on its purchases of bank-held shares to 3 trillion yen from 2 trillion yen.

April 1: The BOJ raises the current-account deposit target from a range of 15 trillion yen to 20 trillion yen to a range of 17 trillion yen to 22 trillion yen.

April 30: The BOJ raises the current-account deposit target to a range of 22 trillion yen to 27 trillion yen.

May 17: The government decides to bail out the Resona Holdings Inc. group. The BOJ offers support via “tokuyu” special loans.

May 20: The BOJ raises the current-account deposit target to a range of 27 trillion yen to 30 trillion yen.

June 11: The BOJ decides to start outright purchases of asset-backed securities.

Aug. 7: The BOJ punishes officials who have left inaccurate statistical data uncorrected for more than a year.

Sept. 16: The BOJ extends the deadline of the stock-buying program by another year to end in September 2004.

Oct. 10: The BOJ lifts the upper end of its current-account deposit target to 32 trillion yen, and clarifies its commitment to continue quantitative easing.

Nov. 29: The government decides to nationalize Ashikaga Bank. The BOJ offers funding support.

Dec. 26: The Finance Ministry announces a deal to sell up to 10 trillion yen worth of U.S. Treasury securities to the BOJ under a repurchase agreement, to raise funds for foreign-exchange market intervention.

Jan. 20, 2004: The BOJ raises its current-account target range to between 30 trillion yen and 35 trillion yen, and eases rules on outright ABS purchases.

Feb. 3: The yen hits 41-month highs above 105 to the dollar.

Feb. 26: The BOJ decides to consider a system to lend government securities out of its holdings to market players.

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