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Governor Shirakawa Defends BOJ's Self-Imposed Cap on Government Bond Buys

Bank of Japan Governor Masaaki Shirakawa defended the central bank’s self-imposed cap on government-debt purchases, saying too much buying could erode investor confidence and drive up yields.

“If the BOJ’s debt buying is regarded as a tool to help pay for fiscal spending or manipulate long-term rates, it would have adverse effects” on growth, Shirakawa told a parliamentary committee today in Tokyo. The bank stipulates that purchases cannot exceed the amount of banknotes in circulation.

Shirakawa made the comment in a response to a question by ruling Democratic Party of Japan lawmaker Tsutomu Okubo, who urged the bank to abandon the cap and buy more government bonds to help spur the economic expansion. The central bank is facing escalating calls to loosen monetary policy as the nation’s growing debt burden limits Prime Minister Naoto Kan’s ability to bolster growth.

“The country’s long-term rates have been stable at low levels because there is a confidence in the country’s efforts to restore fiscal finances and the central bank’s policy,” Shirakawa said. Should investors lose that confidence “long- term interest rates would be driven up and hurt economic growth,” he said.

The cap isn’t hindering the central bank’s ability to provide ample liquidity to the money market, the governor said, adding that the rule could be altered should the policy board determine that is necessary.

Lawmakers aren’t the only ones suggesting that more BOJ bond purchases could help the economy. Takahira Ogawa, director of sovereign ratings at Standard & Poor’s, said in an interview yesterday the BOJ should consider increasing purchases because that could ease deflationary pressure.

BOJ Balance Sheet

The BOJ buys 1.8 trillion yen ($21.5 billion) of bonds each month from the market. Bank notes have stayed at about 77 trillion yen since 2007, while bonds on the BOJ’s balance sheet have climbed to 57.2 trillion yen, according to the bank’s website.

Shirakawa also said cutting interest rates to zero would drive investors and traders from the money market. The benchmark overnight lending rate is at 0.1 percent.

He reiterated that the central bank is paying more attention to the economy’s downside risks and stands ready to implement policy action if necessary.

He also said the bank’s Aug. 30 decision to expand a credit program at an emergency meeting was not intended to influence foreign-exchange rates and stock prices. The effect of monetary policy won’t emerge in a few days or in a week, the governor said. He was responding to Okubo’s comment that the yen’s gain and stock slide since the emergency meeting may suggest the bank’s actions were insufficient.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

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