BOJ Agreed Economic Uncertainty Rising, Minutes Show

By Mayumi Otsuma

Nov. 6 (Bloomberg) -- The Bank of Japan's policy board last month agreed that the economic outlook was becoming more uncertain as strains in global financial markets intensified, meeting minutes show.

Some members said ``the timing of the economy's return onto a sustainable growth path was highly uncertain and that it would be later than previously expected,'' according to the minutes of the Oct. 6-7 meeting released today in Tokyo.

Governor Masaaki Shirakawa and his colleagues last week cut the key overnight lending rate to 0.3 percent from 0.5 percent, its first reduction in more than seven years. Shirakawa said yesterday that his board needs to focus on the risk that the economy will deteriorate further because of the market turmoil.

The bank will keep cutting rates ``given the possibility that the economy will worsen, stocks will be weak and the yen will be strong,'' said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd. Sano predicted the benchmark rate will be lowered to 0.1 percent by the end of March.

Central banks around the world are lowering rates to limit the damage from the crisis and prop up their economies. The U.S., China, India, Australia, Taiwan, Norway and Saudi Arabia cut borrowing costs in the past week, and the European Central Bank and the Bank of England are expected to follow suit today.

Policy makers decided to lower the key rate last week after the Nikkei 225 Stock Average slumped to lowest level since 1982 and the yen surged to a 13-year high against the dollar. The decision was evenly split between the eight-member board, requiring Shirakawa to cast the deciding vote. Three of the four dissenters wanted a 25 basis-point cut and one favored no change.

Inflationary Pressure

In the earlier October meeting, many members agreed that global price pressure remained high. The Bank of Japan needed to watch developments in consumers' inflationary expectations and the ways companies set prices, they said.

Reports since the meeting showed increases in Japan's consumer prices have moderated as commodities costs decline. The central bank last week forecast prices excluding fresh food will be flat in the fiscal year starting April 1.

A few members said central bank should bear in mind that keeping rates low for too long could ``lead to swings in economic activity and prices'' that hamper growth in the long run, according to the minutes.

The policy board reiterated that concern even after lowering the benchmark rate last week, saying the risk still applied ``from a longer-term perspective.''

The bank also released minutes from an emergency board meeting held on Sept. 29, when it agreed to double the supply of dollars in Japan as part of a currency-swap arrangement with the U.S. Federal Reserve to help thaw credit markets.

Many board members said providing dollars alone wouldn't solve the global financial disruptions. Policy makers should take measures to address financial institutions' lack of capital, they said.

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