BOJ rift surfaces over easing as political debate heats up

TOKYO/NAGOYA, Japan (Reuters) - A split within the Bank of Japan was laid bare on Monday, with newcomers to its board pressing to strengthen commitment to an ultra-loose policy, as pressure on the central bank for bolder action intensified in the run up to next month's election.

Shifting the debate away from the central bank, BOJ Governor Masaaki Shirakawa repeated his view that monetary easing alone cannot beat deflation, urging the government pursue fiscal reform and deregulation to boost domestic investment.

But minutes of the October 30 meeting of the nine-member board released on Monday showed Takehiro Sato, one the newcomers, had suggested a more activist stance on monetary expansion once Shirakawa's term ends in April.

The conduct of policy became one of the most heated areas of political debate ahead of the December 16 election after Shinzo Abe, the leader of the opposition Liberal Democratic Party and likely next prime minister, called for the central bank to adopt negative interest rates among other radical measures.

Abe also threatened to take away the BOJ's independence to allow the government to call the shots on targets and policy action.

Sato, a former economist who has consistently called for more BOJ measures to keep yen rises in check, proposed linking monetary policy more closely to a rise in consumer prices and suggested giving up the BOJ's view that consumer inflation will approach 1 percent in the fiscal year ending in March 2015.

The minutes of the Oct 30 meeting showed Takahide Kiuchi, another former economist who joined the board with Sato in July, was alone in his support for the proposal, and their views lacked broad support.

"A few members raised the issue of whether it was possible to further exert influence on interest rates and demonstrate the BOJ's clearer stance on monetary easing by changing the current wording," the minutes showed.

"Most members expressed a cautious view regarding making changes to the wording of the policy commitment at this point."

At last month's meeting, the BOJ eased monetary policy by boosting its asset-buying program by 11 trillion yen ($133.5 billion), to 91 trillion yen. It also unveiled a plan to supply banks with unlimited cheap long-term funds under a new scheme initially seen sized around 15 trillion yen.

But that has not eased pressure on the BOJ.

Investors have bet on bolder monetary easing by the BOJ as Abe repeated calls for "unlimited" policy loosening, which drew strong opposition by incumbent prime minister and ruling party leader Yoshihiko Noda.

A weekly gauge of sentiment in the Japanese government bond market worsened to a level unseen in nearly five months on speculation of more aggressive easing following a likely change in the government after an election next month.

QUESTION OF DEGREE

The LDP's Abe, who was last prime minister in 2007, is calling for far more aggressive monetary measures to revive Japan's struggling export dependent economy, including a commitment to an inflation target of 2 percent to overcome deflation, with a change to the BOJ's governing law.

Sato proposed that the BOJ should say it will maintain ultra-easy policy until a 1 percent rise in consumer prices has been maintained, which is stronger that the BOJ's current commitment to maintain strong monetary stimulus until 1 percent inflation can be foreseen.

The BOJ now sets a 1 percent inflation target and sees as desirable medium- to long-term price growth in a range of zero to 2 percent.

Governor Shirakawa declined to respond directly to Abe's requests, saying only that the government and the central bank were doing their best to achieve the 1 percent price goal.

"If efforts to narrow Japan's output gap bears fruit, price growth and price expectations will gradually rise," he told business leaders in Nagoya, central Japan.

Shirakawa also said the BOJ was mindful of the pain a strong yen was inflicting on Japan's economy, suggesting its readiness to ease policy again should Japan slip deeper into recession.

Japan's main opposition Liberal Democratic Party (LDP) kept its clear lead ahead of the election, opinion polls showed on Monday, with the hawkish Japan Restoration Party (JRP) led by a nationalist ex-Tokyo governor running second.

($1 = 82.3850 Japanese yen)

(Writing by Leika Kihara; Editing by Simon Cameron-Moore)

Source: http://news.yahoo.com/boj-rift-surfaces-over-easing-political-debate-heats-050031481--business.html

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