BOJ Members Express Concern About Global Banks, Minutes Show

By Mayumi Otsuma

Sept. 22 (Bloomberg) -- Bank of Japan policy board members said they were concerned that U.S. and European banks may report more losses, spurring volatility in financial markets, August meeting minutes show.

``Members shared the view that global financial markets remained unstable due mainly to concerns about further losses that U.S. and European financial institutions might incur,'' according to minutes of the Aug. 18-19 meeting released today in Tokyo. ``The possibility of a further slowdown in the global economy'' has also caused instability, the members said.

Global financial markets reeled after the Lehman Brothers Holdings Inc.'s bankruptcy last week, prompting the U.S. government to rescue American International Group Inc. to prevent the crisis from spreading. Central bank policy makers said it is difficult to predict the outlook for the U.S. economy because of falling home values and financial-market turmoil.

``Members agreed that there was considerable uncertainty regarding when and how the negative-feedback loop between financial markets, asset prices and economic activity would diminish,'' the minutes said.

Exports are losing steam and the nation's expansion is stagnating, the central bank said last week. A global financial crisis spurred by the bankruptcy of Lehman may weaken Japan further, economists say, diminishing hopes the economy would rebound after contracting in the second quarter.

``The Japanese economy is worsening and increasingly approaching the state the bank has presented as a risk scenario,'' Mari Iwashita, chief market economist at Daiwa Securities SMBC in Tokyo. ``Policy makers seem to realize that the timing of the economy's pickup is being delayed.''

`Shifted Downward'

A few members said that the slowdown in the economies of Europe and Asia have become more apparent since the previous meeting. One member said that prospects for Japan have ``shifted downward'' since it released its economic outlook in July.

The nation's executives are turning pessimistic about their prospects. Sentiment among large manufacturers will probably fall to a five-year low this quarter, economists expect the central bank's Tankan survey to say Oct. 1.

One board member said ``the risk that the economy may return onto a growth path later than expected also warranted attention.''

The world's biggest central banks last week agreed to pump $180 billion into the global financial system to restore confidence after banks hoarded money on concern more will follow Lehman Brothers Holdings Inc. into bankruptcy. The Bank of Japan said it will offer up to $60 billion to local and foreign financial institutions for the first time to help them borrow dollars.

Global Turmoil

Central banks will continue to discuss measures they can jointly take to ease global market turmoil, Bank of Japan Governor Masaaki Shirakawa told parliament on Sept. 19.

A few members said the bank needs to keep in mind that keeping rates low for too long will hamper sustainable growth should the economy pick up.

One member said monetary conditions are accommodative globally and the Bank of Japan shouldn't be complacent about inflationary risk just because crude oil has become cheaper and wages aren't fueling a price spiral, minutes said.

The central bank last week kept the benchmark key rate unchanged at 0.5 percent, the lowest among major economies. One member said the bank should ``continually examine whether the level of the policy interest rate was appropriate.''

Regarding market conditions in Japan, a few members said the number of bankruptcies among constructions and real-estate companies have been increasing, making it more difficult for those companies in those sectors to sell bonds.

One member said smaller companies are having difficulty borrowing money and this trend needs to be watched.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net