DJ: Some BOJ Board Members Said Extending Maturities To 5 Yrs An Option

TOKYO--Some Bank of Japan policy board members said in January that buying longer-term Japanese government bonds could be considered as a way of strengthening monetary easing efforts to tackle deflation, a controversial step the bank has so far avoided out of concern it would be viewed as monetizing public debt.

"For instance, extending the maturity of the JGBs that the BOJ buys up to around 5 years is an option," two board members said at the Jan. 21-22 policy meeting, according to minutes released by the BOJ on Tuesday.

While financial markets have long speculated that the BOJ will eventually buy longer-term JGBs to further lower market interest rates across the board, the BOJ has been wary of such a step given the scale of the country's huge public debt, now twice the size of the economy. The BOJ currently buys JGBs with maturities of up to three years under its asset-purchase program.

Explicit references by some board members to the possibility of buying longer-term bonds for the first time could intensify speculation that the central bank will consider the step in coming months, particularly in April, when the policy board meeting will feature a new BOJ governor and two deputy governors.

Current BOJ Gov. Masaaki Shirakawa has announced he will step down on March 19, at the same time as his two deputies.

The minutes showed that Mr. Shirakawa stressed further consideration of the matter was crucial to avoid the view that the BOJ is involved in "debt financing" when it increases its purchases of JGBs.

At January's meeting the BOJ agreed with the government to jointly pursue a landmark 2.0% inflation target as early as possible to bring an end to deflation. But two board members, Takahide Kiuchi and Takehiro Sato, who are seen as dovish board members, voted against the decision to set the 2.0% inflation target from the previous 1.0% price goal.

Mr. Kiuchi and Mr. Sato cautioned that introducing a 2% inflation target "risks undermining the credibility of the bank's monetary policy and disrupting communication with the market due to the high uncertainty of achieving the goal."

Claiming the target is inconsistent with what the BOJ considers to be sustainable price stability levels, they argued that setting the 2.0% price rise goal alone "was highly unlikely to exert a substantial influence on inflation expectations".

To achieve the 2% price target, the central bank decided to introduce an "open-ended" commitment to carry on with purchases of financial assets from 2014, and a virtual zero interest-rate policy as long as deemed necessary.

The decision initially disappointed markets, as such an approach won't be taken until next year.

The minutes showed that one board member said an immediate introduction of the approach was an option.

From 2014, the BOJ will buy around Y12 trillion of government debt--mainly short-term Treasury bills--every month. But taking into account the amount of debt maturing during the period, the total increase will be a modest Y10 trillion for the entire year from the current planned total of Y101 trillion by the end of this year.

Some board members as well as government officials attending the meeting also suggested bold monetary easing as a channel for affecting the currency market. Such a view may conflict with the latest statement of the Group of Seven industrialized nations that foreign exchange rates should not be a target of fiscal and monetary policies.

Mr. Shirakawa said after the Feb. 13-14 meeting that while it is true monetary policy can have an impact on exchange rates because of the globalized financial market, the goal of the BOJ is to beat Japan's deflation and generate lasting growth, not to guide exchange rates.

A senior finance ministry official who attended the January meeting, emphasized the importance of monetary policy to the new administration of Prime Minister Shinzo Abe.

"Given that a bold monetary policy was expected to eliminate deflation expectations and generate positive effects through foreign exchange rates, the government deemed this the most important part of the three-pronged strategy" advocated by Mr. Abe, along with flexible fiscal spending and growth strategy, he said.