RTTNews - The Bank of Japan's board members said that the move that allowed foreign debt to be used as collateral could possibly become a permanent condition, minutes from the May 21 and 22 monetary policy meeting revealed on Friday.

The minutes also indicated that the continuation of the unusual measures will depend on the response of the markets. The board expects that private consumption could weaken further, and that it must be vigilant against a decline in inflation expectations and volatility in long-term rates.

Given the current situation, where domestic and overseas financial markets were starting to show some signs of improvement but were still unstable, it would be appropriate for the bank to temporarily accept bonds issued by foreign governments as eligible collateral for its provision of credit in order to further facilitate money market operations and thereby ensure stability in financial markets, the minutes showed.

It was later suggested that the measure become permanent, although the board opted to wait and see what happens to the economy.

At the meeting, the board unanimously decided to maintain the uncollateralized overnight call rate at 0.1 percent, as expected. The central bank also expanded the range of eligible collateral to ensure financial market stability by further facilitating money market operations.

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.

As for the future conduct of monetary policy, members concurred that the bank should be attentive to downside risks to economic activity and prices and continue to conduct monetary policy steadily in line with measures taken so far, which could be divided into three areas: reducing the policy interest rate, ensuring stability in financial markets by providing ample liquidity, and facilitating corporate financing, the minutes said.

The BoJ also assessed that economic conditions have been deteriorating, but exports and production are beginning to level out. Looking forward, exports and production are expected to start recovering despite the continuing weakness in domestic private demand. The pace of deterioration in economic conditions is likely to moderate gradually, leading to a leveling out of the economy, the central bank said.

In the previous month, the central bank had stated that the economic conditions in Japan have deteriorated significantly.

With regard to the outlook for economic activity in the latter half of fiscal 2009 onward, members agreed that Japan's economy was likely to start recovering with medium to long-term expectations of future growth generally unchanged, supported partly by the positive effects of measures to stabilize the financial system and of fiscal and monetary policy measures, in addition to a recovery in overseas economies and improvements in conditions in global financial markets, the minutes said.

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