TOKYO (Reuters) - The Bank of Japan’s policy dilemma came into sharp focus on Friday: Continue a massive but ineffectual stimulus drive to fire up inflation or further tweak its policy framework to address the rising cost of prolonged monetary easing.
These were essentially the choices on offer in a summary of opinions from the BOJ’s September meeting, released on Friday, as members debated the potential benefits of modifying their massive stimulus again just two months after taking steps to prop up bond market activity.
One member was quoted as saying “there is room for the BOJ to consider making its monetary policy more flexible in the future” to revive bond market trade, on condition the economy kept recovering.
Another board member cast doubt on whether maintaining the BOJ’s current policy, which guides short-term rates at minus 0.1 percent and long-term rates around zero percent, was effective as the positive impact of monetary easing diminishes over time.
“Since there is a limit to continuing with large-scale monetary easing due to its side effects, the time frame for monetary policy should be discussed more among the board,” the second policymaker was quoted as saying.
The BOJ kept policy steady at the September meeting, after taking steps in July to make its monetary framework sustainable such as allowing bond yields to move more flexibly around its zero percent target.
Despite the July measures, bond yields have hugged a tight range on investors’ anticipation the BOJ would step in to curb any unwelcome rise in long-term rates.
The board has been divided between those who fret about the rising cost of prolonged easing, and those who persist the BOJ should do more to accelerate inflation towards its 2 percent target.
BOJ Governor Haruhiko Kuroda has recently shifted his tone on monetary policy, stressing more than before the need to address the demerits of ultra-loose policy.
As the economy recovers, even lawmakers who had pressured the BOJ to do more to beat deflation are now becoming more amenable to the idea of dialling back crisis-mode stimulus.
But some BOJ policymakers are becoming worried that Japan’s export-reliant economy could be hit by global uncertainties, as U.S. President Donald Trump’s protectionist policies threaten to hurt trade, the summary of opinions showed.
“Attention should be paid to heightening uncertainties over Japan’s economic and price outlook, given a string of natural disasters in Japan and concern over global trade frictions,” one board member was quoted as saying.
The summary of opinions does not identify the policymakers whose comments are quoted.
Reporting by Leika Kihara; Editing by Shri Navaratnam and Eric Meijer