BOJ Members Said Exit Policy Up to Markets, Economy

By Mayumi Otsuma

June 19 (Bloomberg) -- The Bank of Japan should consider whether to stop pumping extra cash into the banking system by evaluating trends in corporate financing and the economy, some policy board members said last month.

They said whether to keep buying corporate debt from banks and providing them with unlimited loans after Sept. 30 “should be determined based on close examination of developments in financial markets and corporate financing,” according to minutes of their May 20-21 meeting published in Tokyo today.

Governor Masaaki Shirakawa said this week that the central bank will decide how to deal with the measures “by the end of September in a predictable manner to market participants.” The Bank of Japan said this week that the country’s worst postwar recession is easing as fiscal stimulus measures worldwide spur demand and companies increase production.

“The governor explicitly indicated the bank will let financial markets know in advance should it decide to make any changes to the policy measures,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “The bank probably wants to allow investors to incorporate policy changes sufficiently beforehand.”

The yen traded at 96.68 per dollar at 9:55 a.m. in Tokyo from 96.66 before the minutes were published.

At the May meeting, the policy board raised its assessment of the economy for the first time since 2006. It lifted the evaluation again this week, saying the economy has “begun to stop worsening.” Still, Shirakawa said he is “cautious” about the rebound because renewed demand may only be temporary.

‘Lose Steam’

“Japan’s economy will probably return to growth this quarter and achieve a pretty solid expansion next quarter,” said Ryutaro Kono, chief economist at BNP Paribas SA in Tokyo. “However, the rebound will lose steam next year, when the stimulus effect evaporates. It may well become the shortest recovery since the end of World War II.”

One board member said the central bank needs to pay attention to the risk that bond yields will rise because the government plans to issue more debt. Higher bond yields drive up borrowing costs on mortgages and loans.

The yield on Japan’s 10-year bond rose to 1.47 percent at 9:55 a.m. today after touching 1.44 percent yesterday, the lowest since May 26.

Some members said there’s a risk that companies and households will expect prices to fall as demand slackens. A Cabinet Office official who attended the meeting also alluded to the risk that deflationary expectations may take hold.

Falling Prices

Consumer prices excluding fresh food declined in March and April, and the central bank expects them to keep falling next fiscal year.

At the same time, some members said the bank should watch the risk that commodity prices will increase, stifling the economy’s revival by increasing costs for companies and consumers. Crude oil has risen 20 percent in the past month.

Since lowering the overnight lending rate to 0.1 percent in December, the central bank began buying commercial paper and corporate bonds from lenders. It has also offered to lend to commercial banks limitlessly in exchange for sufficient collateral. The programs expire on Sept. 30.

A weak recovery will probably compel the bank to keep rates on hold until 2012 at the earliest, Nishioka added.

Finance ministers from the Group of Eight nations said over the weekend that they need to begin considering how to roll back policies to counter the financial crisis as their economies show signs of improvement.

Ending Policies

Atsushi Mizuno, a Bank of Japan board member, last month said central banks need to start discussing how to end their unconventional policies even though the global economy is still in a slump.

BOJ policy makers forecast the world’s second-largest economy will return to growth in the year starting next April after contracting for two years.

Gross domestic product will shrink 3.1 percent in the year ending March and expand 1.2 percent in the following 12 months, the central bank said in its twice-yearly outlook on April 30. Policy makers will review the forecasts next month.

One board member said the central bank’s decision in May to start accepting sovereign bonds from the U.S., the U.K., France and Germany should become a permanent measure.

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