BOJ board rift over ambitious price goal will test Governor Kuroda

Mon May 27, 2013 1:58am EDT
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By Leika Kihara

TOKYO (Reuters) - A rift within the Bank of Japan's board over how to steer its radical monetary stimulus to end nearly two decades of damaging deflation underlined the early challenges Governor Haruhiko Kuroda faces in his efforts to foster sustained growth.

The differences of opinion were highlighted in the minutes of the April 26 meeting, which showed some policymakers opposed targeting 2 percent inflation in two years and called for more flexibility in guiding monetary policy.

The board also engaged in considerable debate over the recent bond market volatility that followed the BOJ's monetary easing on April 4, a sign the members were uneasy about the rise in borrowing costs that could undermine the central bank's ultra-loose policy.

"We're still seeing potential instability in the bond market," one member was quoted as saying in the minutes released on Monday.

The rift and the market volatility, which also hit Tokyo shares, pose a challenge to Prime Minister Shinzo Abe's sweeping monetary and fiscal expansionary policies aimed at reviving Japan's long-dormant economy.

They also underscore concerns, even within the BOJ, over the central bank's stimulus plan that relies heavily on lifting sentiment and creating expectations of future inflation and growth.

"Given how extreme the April easing step was, it's natural for disagreements to exist within the BOJ," said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo.

"Failure to meet the price target will test the BOJ's credibility. But the bank's policy itself is contradictory. When expectations of inflation heighten, bond yields will rise. The BOJ can't really do anything to stop that."   Continued...

A security personnel stands guard at the Bank of Japan building in Tokyo, May 22, 2013. REUTERS/Yuya Shino