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BOJ Minutes: 1 Member Said Limiting QE Could Help Stabilize JGBs

Shubiya district, Tokyo, Japan
Getty Images
Shubiya district, Tokyo, Japan

One member of the Bank of Japan's policy board said limiting quantitative easing to two years could help stabilize the bond market as the central bank's communications about its monetary policy may actually be increasing JGB volatility, minutes from its May 21-22 meeting showed on Friday.

The member, most likely Takahide Kiuchi, also said that because it is difficult to meet 2 percent inflation in two years, the BOJ should limit quantitative easing to avoid financial imbalances, the minutes showed.

Kiuchi's lone voice of dissent lacks the support of other central bankers for now but could spark concerns that divisions could grow as the BOJ's expanded monetary easing has unintentionally caused bond yields to rise.

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"One member said that because it is difficult to meet the BOJ's price target, there could be speculation that the BOJ will take more extreme measures, which could cause financial imbalances," the minutes showed.

"In response, several members said that the current policy framework allows the BOJ enough flexibility."

At the May 21-22 meeting, the BOJ decided to keep its expanded monetary policy on hold, but board member Kiuchi unsuccessfully proposed loosening the BOJ's 2 percent inflation target by making it a medium- to long-term goal.

Kiuchi's proposal was rejected in an 8-1 vote.

The BOJ currently aims to achiefve its inflation goal in two years.

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At a subsequent meeting that ended on Tuesday, the BOJ left policy unchanged but kept the door open to making minor changes to market operations to stem a recent rise in yields.

The BOJ stunned financial markets on April 4 by setting in motion an intense burst of monetary stimulus, promising to double its bond holdings in two years and boost purchases of risk assets to end 15 years of deflation.

One original aim of the central bank's JGB buying was to reduce long-term interest rates, which could act as a lever to revive consumption.

But the massive scale of the purchases jolted markets instead and prompted a rush of sellers. The 10-year bond yield jumped to a one-year high of 1.0 percent on May 23. Yields have since pulled back to 0.85 percent. The spike in borrowing costs raised concerns it could undermine the BOJ's ultra-easy policy.

BOJ board members agreed that purchases of government debt will contain any gains in bond yields as the economy and inflation expectations improve, the minutes showed.

The BOJ also needs to send a message that it will keep short-term interest rates low with market operations, one member said in the minutes.

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Many private-sector economists have said the BOJ's two-year time frame for reaching its inflation target is overly ambitious as the output gap is not likely to close quickly enough.

The median forecast of BOJ board members shows they expect core consumer inflation, the central bank's preferred gauge for price trends, to reach 1.9 percent in the year to March 2016, close to the bank's target. But the forecasts of the board members differed widely, from 0.8 percent to 2.3 percent.