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TOKYO (MNI) – Some Bank of Japan board members warned that it’s
uncertain whether the economy will remain stable after returning to what
they expect to be a moderate recovery track, the minutes of the BOJ’s
Jan. 24-25 policy-setting meeting released Friday showed.

The minutes said, “… some members expressed the view that, even
though the probability of the economy returning to a moderate recovery
path had increased, subsequent economic developments remained
uncertain.”

“A few members were of the opinion that attention should also be
paid to the possibility that a continued rise in international commodity
prices would have negative effects on Japanese firms’ profits through a
deterioration in the terms of trade.”

A surge in import costs will hurt Japan’s terms of trade and thus
its purchasing power, which in turn could dampen consumer spending and
increase downward pressure on the fragile economic recovery.

“Regarding European economies, many members said that risks had
relatively increased,” the minutes said.

BOJ board members noted that financial markets in Europe remain
unstable on concern over sovereign risks in the region.

After a two-day policy-setting meeting ended on Jan. 25, the BOJ’s
policy board voted unanimously to continue the bank’s very stimulative,
practically zero interest rate policy by maintaining the target for the
overnight lending rate among commercial banks at zero to 0.1%. The
policy remains unchanged after the following meeting on Feb. 14-15.

On globally rising food and energy costs, some board members noted
that “international commodity prices would continue to be on an uptrend
supported by demand in emerging economies, but at the same time were
likely to continue to be highly volatile reflecting the increasing
effects of the inflow of speculative funds,” according to the minutes.

“One member expressed the view that, given these circumstances, it
was important to closely examine whether the rise in international
commodity prices was in line with the developments in economic
fundamentals.”

Regarding the effects of encouraging a drop in longer-term interest
rates, “One member expressed the view that the effects of the
comprehensive monetary easing were difficult to see at present given
that the level of long-term interest rates had risen somewhat.”

Some board members, according to the minutes, noted that the degree
of the rise in Japanese long-term interest rates — even amid the rise
in stock prices — was marginal compared with that in U.S. and European
long-term interest rates, and that the BOJ’s “comprehensive” monetary
easing had been effective in constraining the rise in interest rates.

The minutes also said, “some members were of the view that it was
important for the BOJ to secure market confidence in its policy time
horizon, and in doing so, explain consistently to the public that it
would maintain the virtually zero interest rate policy until it judged
that price stability was in sight.”

As for risks to Japan’s prices, “Some members expressed the view
that the BOJ should examine price developments by acknowledging the
likelihood that the year-on-year rate of change in the CPI would be
revised downward due to the revision of the base year.”

“A few members were of the view that, if a downward revision of the
year-on-year rate of change in the CPI did happen due to the revision of
the base year for the CPI, attention needed to be paid to whether such a
revision affected the inflation expectations of economic entities.”

Economists estimate that the CPI y/y change will be revised down by
0.4 to 0.5 percentage point in August, when the government plans to
update the base year to 2010 from 2005 and review the basket of goods
and services used to calculate CPI data.

In an update to its medium-term outlook released last month, the
BOJ board expected core consumer prices to show a 0.6% gain in fiscal
2012 after rising a modest +0.3% in fiscal 2011 and after an estimated
0.3% fall this fiscal year, all little changed from its previous
projections made in October.

BOJ Governor Masaaki Shirakawa has said that despite the expected
downward revision, deflation is gradually abating in Japan.

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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