The Bank of Japan board members suggested that growth estimates for the Japanese economy may require a downward revision, minutes from the March 17 and 18 monetary policy meeting revealed on Friday.
The board members agreed that financial tensions are increasing again, the minutes showed, emphasizing the need for continued substantial liquidity. There remains significant uncertainty about the timetable for recovery, the minutes showed.
Financial conditions had remained tight, the minutes said. The overnight call rate had been at an extremely low level, but the stimulative effects from this had become increasingly limited given the significant deterioration in economic activity. Firms' funding costs had declined compared to their levels at the end of 2008 following the reductions in the policy interest rate and improvements in issuance conditions in the CP market. The amount outstanding of CP and corporate bonds issued had been increasing since a while ago, and that of bank lending, especially to large firms, had continued to increase rapidly.
At the meeting, the board voted unanimously to keep the overnight call rate unchanged at 0.10 percent. The bank cut rates in December by 20 basis points to the current level - marking the first easing October 31, when the bank lowered rates by 20 basis points from 0.50 percent. That rate cut was the bank's first in seven years, and it snapped a strong of 22 consecutive meetings of keeping the rates on hold. The BoJ had kept rates unchanged since a 0.25 percent increase in February 2007.
With an intention to ease money market conditions, the Policy Board decided to utilize long-term funds-supplying operations by increasing its outright purchases of Japanese government bonds or JGB.
The amount of such outright purchases of bonds will be raised by 4.8 trillion yen to 21.6 trillion yen per year. Accordingly, the central bank will buy 1.4 trillion yen worth JGB each month, effective from this month.
Many members expressed the view that it was appropriate that the Bank increase the amount of outright purchases of JGBs in order to make greater use of its long-term funds-supplying operations and thereby facilitate smooth money market operations, the minutes said. Some members said that, when increasing the amount of outright purchases of JGBs, the Bank should increase such purchases as much as possible while keeping to the banknote principle -- that the amount of the Bank's JGB holdings should be limited within the amount of banknotes in circulation -- in order to demonstrate the Bank's firm intention to ensure stability in financial markets after the turn of the fiscal year.
On weakening overseas economic conditions, exports are decreasing substantially, while domestic demand dropped against the backdrop of falling corporate profit and the worsening employment. Despite improvements in issuing conditions for CP and corporate bonds, financial conditions remained tight, the bank said. Under these circumstances, the BoJ assessed economic conditions have deteriorated significantly and are likely to continue deteriorating for the time being.
Much depends on global financial conditions as well as developments in overseas economies, and attention will need to be paid to the downside risks posed to economic activity, the minutes said. In addition, there is the risk of a further weakening in domestic private demand if firms' medium- to long-term growth expectations decline and pressures to adjust capital stocks and employment increase. If financial conditions should tighten further, pressures acting to depress economic activity from the financial side may become more marked and the adverse feedback loop between financial and economic activity may intensify.
Also on Friday, bank lending in Japan excluding trusts was up 3.6 percent on year in March, following a 3.8 percent gain in February. Including trusts, bank lending was up an annual 3.4 percent following the 3.5 percent expansion in the previous month.
M2 money supply was up 2.2 percent, in line with expectations following the 2.1 percent gain a month earlier. M3 was up 1.3 percent, higher than the 1.2 percent forecast and the 1.1 percent gain in February. The broad measure of liquidity remained flat.
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