BOJ Debates Boundaries of Latest Lending Program

Masaaki Shirakawa, governor of the Bank of Japan
Masaaki Shirakawa, governor of the Bank of Japan, attends the 2010 International Conference, "Future of Central Banking under Globalization," at the Bank of Japan headquarters in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg

May 26 (Bloomberg) -- Bank of Japan board members said the central bank should avoid getting too involved in the allocation of capital in its latest effort to spur lending and economic growth, a record of their April 30 meeting showed.

“The bank should devise ways to avoid its excessive involvement in resource allocation among individual firms,” a few members said at the meeting. In a speech in Tokyo today, Governor Masaaki Shirakawa said measures that border on fiscal policy can “undermine credibility for central banks.”

The remarks reflect concern among the board over policy boundaries as it tries to defeat deflation that has persisted even after cutting interest rates close to zero and offering to lend 20 trillion yen ($222 billion) to commercial banks. Former board member Atsushi Mizuno said last week that the BOJ is “treading a delicate line” with the program being developed that seeks to encourage lending in areas with growth potential.

“Those comments are a message that the Bank of Japan doesn’t have much room left with its measures to stimulate the economy,” said Hiromichi Shirakawa, a former central bank official and chief Japan economist at Credit Suisse Group AG in Tokyo. “The BOJ is cautious about implementing further measures,” said Shirakawa, who isn’t related to the governor.

The bank said last week it will provide one-year loans at the same rate as the 0.1 percent key overnight lending rate to encourage lending.

Instructed Staff

Shirakawa last month instructed his staff to hammer out details of the plan, his latest attempt to tackle deflation that he says has been prolonged by stagnating economic growth. He has said the credit would seek to spur lending in areas such as energy, the environment and technology.

The board agreed at last month’s meeting that the lending facility should prevent constraints on the “regular conduct of monetary policy,” avoid excessive resource allocation among individual companies and ensure the bank’s financial health, according to the minutes.

“Unconventional policy measures taken by a central bank involve quasi-fiscal policy elements” that could later draw criticism, Shirakawa said in today’s speech at the central bank in Tokyo. “Such a situation is likely to undermine credibility for central banks, and thus affect their policy performance.”

Federal Reserve Chairman Ben S. Bernanke also spoke at the Bank of Japan today, saying that central banks must be free from political pressure as they bolster regulation and try to prevent future financial crises.

Meet Responsibilities

“In exchange for this independence, central banks must meet their responsibilities for transparency and accountability,” Bernanke said.

The Bank of Japan has faced pressure to fight deflation from the government, whose ability to spur the economy is constrained by record public debt. Finance Minister Naoto Kan has been urging the bank to adopt an inflation target, and last week repeated that he expects it to support the recovery, which has mainly been driven by exports.

Shirakawa today warned against becoming too fixated on prices when setting policy. Central banks should aim to achieve a stable financial environment that helps sustain growth, and price stability is “not the sole factor,” he said.

Low inflation during a period of economic overheating in the 1980s persuaded the Bank of Japan to delay policy tightening, exacerbating the bursting of the country’s asset bubble, the governor said in the speech.

Tolerate Inflation

That crisis led to the deflation that Japan has been struggling to shake off for more than a decade. Board members at their April 30 meeting forecast consumer prices will resume rising next fiscal year, while stressing the need to tolerate some inflation to ensure they keep climbing.

“Many members said that it was necessary to accept some inflation as a ‘safety margin’ that acted as a buffer against the risk of falling into a vicious circle of declining prices and deteriorating economic activity,” today’s minutes said. One policy maker said inflation of “only slightly over zero percent” was too small to constitute a safety margin.

Consumer prices excluding fresh food will climb 0.1 percent in the year ending March 2012 after falling 0.5 percent in the current period, according to the board’s median projection. Policy makers consider price movements to be stable within a positive range of up to 2 percent.

Next year’s predicted gain in prices would be at a very low end of the range and “there remains a very long way for the BOJ to go before considering a rate hike,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

To contact the reporters on this story: Toru Fujioka in Tokyo at; Aki Ito in Tokyo at

To contact the editor responsible for this story: Chris Anstey at