Mizuno Opposed Bank of Japan’s October Rate Cut

By Mayumi Otsuma

Nov. 27 (Bloomberg) -- Bank of Japan board member Atsushi Mizuno voted against the Oct. 31 decision to cut interest rates, saying the central bank should focus on measures to promote the flow of money through the financial system, minutes show.

Mizuno dissented because “the current policy priority of the bank was to implement measures to enhance the smooth flow of funds” in corporate and government debt markets, according to the minutes released today. The board should leave room for further action in case the economy “worsened further,” he said.

The bank trimmed the benchmark overnight rate to 0.3 percent from 0.5 percent at the meeting to help stave off a prolonged recession. Four of the eight members supported the move, three preferred a cut to 0.25 percent, and Mizuno wanted the rate to stay on hold. Governor Masaaki Shirakawa cast the deciding vote.

“Further deterioration in the economy will require more action, irrespective of Mizuno’s stance,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. Adachi predicts the key rate will be lowered to 0.1 percent or 0.15 percent in February.

The yen traded at 95.19 per dollar as of 11:43 a.m. in Tokyo from 95.56 before the minutes were published. Investors see a 9 percent chance of another cut by March, according to JPMorgan Chase & Co. calculations based on interest-rate swaps trading.

Bigger Cut

Miyako Suda, Hidetoshi Kamezaki and Seiji Nakamura were the members who proposed a bigger reduction.

Suda said lowering the rate by an interval other than the “conventional 25 basis points” could “increase uncertainty” about the size of future adjustments. Kamezaki said a smaller move “might convey the impression that the bank was holding back from taking decisive policy action or that there was room for further” cuts. Nakamura said slicing the rate by 25 basis points wouldn’t adversely affect the money market.

Deputy Governors Hirohide Yamaguchi and Kiyohiko Nishimura, together with board member Tadao Noda, joined Shirakawa in supporting the 20 basis-point reduction to 0.3 percent, citing the likelihood that the economy’s “increased sluggishness” will remain “over the next several quarters.” They said a larger cut would impede the function of the money market and hamper the flow of funds through the economy.

“Even a difference of 5 basis points had an effect that could not be ignored,” one member said.

Money Market

Since the meeting, Shirakawa has warned at least six times that further lowering borrowing costs may freeze up the money market by making it unprofitable for banks to lend each other. Economists say the bank could be forced to follow the Federal Reserve and the European Central Bank in trimming rates anyway, should the global financial turmoil prolong Japan’s slump.

“Given that Governor Shirakawa has signaled his reluctance to further lower rates, the chance for a December cut may be receding,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Even so, we expect the bank to be forced to cut rates near zero eventually.”

Some members said the effects of the financial crisis “has spread worldwide, especially to emerging economies.” One said the slowdown in developing nations may in turn be further hurting the U.S. and Europe, creating a “negative feedback loop.”

The market turmoil has also made it more difficult for Japanese companies to obtain funding, the minutes said. Investors are more risk-averse, causing yields on short-term corporate debt to rise and preventing some companies from selling bonds.

As a result, businesses “had increased their dependence on indirect financing, but financial institutions’ lending attitudes had become severe and financial conditions had become less accommodative,” one policy maker said.

The balance of commercial paper, which companies use for short-term funding, fell to 12.8 trillion yen ($134 billion) last month, the lowest since March 2002. The three-month Tokyo interbank offered rate, or Tibor, rose for a 13th day yesterday.

The economy will “pick up gradually” after around September next year, the members agreed.

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