Stark divisions in the views of Bank of Japan board members were highlighted on Monday, with some defending unlimited easing of monetary policy and others arguing the BOJ had done enough – to the point of driving big market swings and sapping bond market liquidity.
The debate underscores the challenges the central bank face as it attempts to address stagnant price growth and entrenched economic weakness with a dwindling set of policy tools.
“The Bank should reject the idea that monetary easing has its limit and side effects. A limit to its purchase of Japanese government bonds (JGBs), if any, would be the total amount outstanding of JGBs issued,” one member told the July meeting, a summary of opinions showed on Monday.
“It is necessary for the Bank to conduct a comprehensive assessment from the perspective of what should be done to achieve the price stability target of 2 percent at the earliest possible time,” another member was quoted as saying.
In a glimmer of hope, a government survey showed on Monday that service-sector sentiment recovered in July from a two-year low hit in June, when markets were jolted by Britain’s vote to leave the European Union.
The government revised up its assessment on service-sector mood for the first time in 16 months to say it was “showing signs of a pick-up.”
The BOJ expanded stimulus at the July 28-29 meeting by doubling purchases of exchange-traded funds (ETF), yielding to pressure from the government and market for bolder action, but the move fell short of market expectations.
The BOJ said it will assess at its September meeting the effects of its negative interest rates on some bank deposits and its massive asset-buying programme – suggesting an overhaul of its stimulus programme may be in the works.
Board members Takehiro Sato and Takahide Kiuchi, both of whom are economists, dissented to the decision to expand ETF purchases, arguing that it would distort market functions and expose the bank’s balance sheet to excessive risk.
“An increase in ETF purchases would make it clear that monetary easing is approaching its limit. Moreover, this action can be regarded as an incremental approach to monetary easing, and could trigger endless expectations for further easing,” one member – likely either Sato or Kiuchi – was quoted as saying.
The summary of the July debate offered no clues to what specific policy steps could result from the BOJ’s assessment of its existing stimulus programme.
Some analysts say the BOJ may ease again at its next rate review on Sept. 20-21 depending on the outcome of the assessment.