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BOJ divided over side effects of easy policy

Rift reflects division among board members on how to address growing dangers of prolonged easing

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At its Oct 30-31 meeting, the Bank of Japan kept policy steady but also notched up its warning on financial vulnerabilities from three months ago.

Tokyo

BANK of Japan (BOJ) policymakers disagreed on the feasibility of allowing bond yields to move more flexibly around the central bank's zero per cent target, reflecting division within the board on how to address the growing dangers of prolonged easing, minutes of their October rate review showed on Wednesday.

The rift highlights the BOJ's deepening dilemma. With inflation distant from its 2 per cent target, it is forced to maintain a massive stimulus programme despite the negative spillover such as the hit to financial institutions' profits from years of near-zero interest rates.

One member said that the central bank should not rule out options such as widening the range in which bond yields could move, or shortening the duration of the government bond yield that it targets from the current 10-year yield, the minutes showed.

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"If the long-term rate target was maintained around zero per cent for a long time, the positive effect of monetary easing on inflation expectations could diminish," the member said.

Another member disagreed, however, saying that doing so when inflation remained low could undermine the BOJ's credibility by casting doubt on its commitment to achieve its inflation target.

"Making the range of movement in long-term yields more flexible, as anticipated by some market participants, could be viewed as though the bank's commitment to achieving 2 per cent inflation was compromised," the member said.

The nine-member board agreed on the need to maintain monetary policy ultra-loose for the time being, while staying vigilant to the impact of prolonged stimulus on Japan's banking system, according to the minutes.

At the Oct 30-31 meeting, the BOJ kept policy steady and its governor Haruhiko Kuroda ruled out a near-term rate hike in the face of risks from global trade disputes.

But the central bank also notched up its warning on financial vulnerabilities from three months ago, nodding to concerns within the board on the rising strain years of easy policy is inflicting on financial institutions.

Under a policy dubbed yield curve control (YCC), the BOJ guides short-term rates at minus 0.1 per cent and the 10-year bond yield around zero per cent.

It made tweaks to YCC in July to allow long-term rates to move more flexibly around its zero per cent target. But the step has done little to steepen the yield curve, as heightening global uncertainty drove investors to the safety of Japanese government bonds. REUTERS