The Bank of Japan on Thursday rejected a surprise proposal by its deputy governor for further credit easing, opting to keep rates on hold to gauge the effect of loosening measures it took following the March 11 earthquake.
In a rare division among the central bank's top brass, Gov. Masaaki Shirakawa said he voted against a proposal by one of his two deputies that the bank increase the size of an asset-purchase program to ease concerns over the quake's impact among businesses and consumers.
"As the BOJ just implemented a drastic easing measure in March, it was judged appropriate to first advance planned asset purchases steadily and examine the effects of the step," Shirakawa said, adding that the central bank is ready to take further action if judged necessary.
Deputy Gov. Kiyohiko Nishimura proposed at the bank's policy board meeting that it should increase the size of the asset-purchase program to Y15 trillion from the current Y10 trillion, but the idea was rejected by a vote of one to eight, the BOJ said.
Shirakawa told a news conference that Nishimura proposed the increase to prevent the possibility of the quake's aftereffects further deteriorating corporate and consumer sentiment and weighing on the economy.
Nishimura's proposal came as a surprise as the central bank had already doubled the size of the fund just days after the earthquake to mitigate the impact of the magnitude 9.0 temblor and the tsunami that devastated parts of northern Japan.
As widely expected, the nine-member board voted unanimously to keep its unsecured overnight call loan rate target unchanged in a range of 0.0%-0.1%.
On the outlook of the economy, the BOJ slashed its growth forecast for the current fiscal year that started April 1 to 0.6% from its January forecast for 1.6%. But for the next fiscal year, it predicts a 2.9% expansion in real gross domestic product, compared with January's forecast for 2.0% growth.
In the semiannual outlook report released after its one-day policy board meeting, the central bank said that the economy would start to recover in the latter half of fiscal 2011, after facing strong downward pressure in the first six months.
However, the central bank said it should pay more attention to downside risks to the economy for the time being, especially the impact of the earthquake.
Some analysts said that although it was rejected by a majority, Nishimura's action sent a positive message to market participants.
The BOJ has been buying a variety of financial assets, from government and corporate bonds to exchange traded funds and real estate investment trust, in a bid to help corporate funding by pushing down long-term interest rates and to defuse concerns about deteriorating investor sentiment.
Ueno expects the BOJ to increase purchases of Japanese government bonds by at least in June or July, in tandem with the government's planned second extra budget to finance recovery efforts.
Ueno said Nishimura's action suggests that the central bank will do so via an expansion of the asset-purchase fund, which is not bound by the so-called "banknote rule," a self-imposed regulation limiting the BOJ's long-term JGB buying to the amount of banknotes in circulation.
But the bank sent out a warning on Japan's fiscal condition, saying that the issue of sovereign debt, including that of Japan, posed a downside risks for the economy.
On Wednesday, Standard & Poor's revised its outlook on Japan's long-term AA- rating to negative from stable due to the increasing fiscal burden caused by the country's devastating earthquake. Japan's outstanding public debt is nearly twice its economy, the largest among the world's richest economies.
The BOJ also finalized the details of a special lending facility to smooth the flow of money to the regions hit by the earthquake. It will make Y1 trillion in one-year loans at a 0.1% interest rate available to financial firms with branches in the affected areas, with each bank borrowing a maximum of Y150 billion of funds.
The board also decided to broaden the range of financial assets it accepts as collateral, another attempt to secure sufficient funding capacity for financial institutions in the disaster-hit areas.
