Bank of Japan flagged need to discuss ideas on easing, meeting summary shows

Some Bank of Japan policymakers warned of risks to the economic outlook and called for discussion on ways to ramp up stimulus, a summary of views from the last rate review showed, a sign the central bank could loosen monetary policy as soon as next month.

Others, however, advised against immediate stimulus due to the strain prolonged easing was inflicting on financial institutions, highlighting the rift in the nine-member board between those who favor more action and those against it.

At the July meeting, BOJ policymakers debated heightening overseas risks that one member said could tip Japan into recession.

“The BOJ must communicate more clearly its resolve to take additional monetary easing steps without hesitation if the momentum to achieve its price target is under threat,” one of the members was quoted as saying.

“We must also consider in advance what steps we can take if we were to ease,” the member added. The summary does not identify which members made the comments.

Several other opinions showed support for pre-emptive monetary easing to forestall risks. One said the BOJ must use both its interest rate targets and forward guidance to ease policy further, without elaborating, according to the summary.

“We need to assess the benefits and demerits of various monetary easing steps,” one member said, a sign that the central bank has a range of easing options it could consider.

At the July meeting, the BOJ kept monetary policy steady but said it would ease without hesitation to pre-empt risks that could hurt the chance of achieving its 2% price goal.

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The escalating US-China trade war has jolted markets and triggered an unwelcome yen spike, piling pressure on the BOJ to ramp up stimulus to support an export-reliant economic recovery.

“The number of opinions calling for pre-emptive action increased sharply, which shows debate within the BOJ is shifting rapidly in favor of easing,” analysts at SMBC Nikko Securities wrote in a research note. “But there is little reference to what specific measures the BOJ could take.”

With interest rates hovering around zero, the BOJ is left with little ammunition to fight the next recession. Prolonged ultra-low rates have also heightened the cost of additional easing by hurting financial institutions’ margin.

One member said the BOJ must be cautious about topping up stimulus, and ensure its measures do not destabilize Japan’s banking system, the summary showed.

“If overseas economies worsen further and hurt Japan’s economy and prices, we must act swiftly with a mix of fiscal and monetary policies,” another member said.

“But it’s important to maintain the current stimulus policy for the time being with an eye on the side-effects to Japan’s financial system.”

A Japanese banking lobby head warned of the dangers to the industry if the BOJ deepened negative rates, saying such a move would affect “not just regional banks but the entire financial industry.”

Under a policy dubbed yield curve control (YCC), the BOJ guides short-term rates at -0.1% and 10-year government bond yields around 0%.

It also has in place forward guidance, or a pledge on future monetary policy moves, that promises to keep rates at current ultra-low levels at least until around the spring of next year.