BOJ weighs ending historic ultra-easy money policy

TOKYO, Mar 8: Japan's central bank will weigh whether to end a five-year experiment with ultra-loose monetary policy, paving the way for a slow rise in interest rates, when its nine-member board starts a two-day meeting on Wednesday (Mar 8, 2006).

Market participants agree that the Bank of Japan is close to abandoning its ''quantitative easing'' policy, adopted in 2001 to avert a banking crisis, halt a deflationary spiral and boost a long-stalled economy.

But they are divided over whether the BOJ will shift policy gears this month or next.

Some board members may want to see more price data to confirm deflation has been well and truly beaten and more time may be needed to finalise ''signposts'' to guide future monetary policy.

The BOJ is widely expected to keep interest rates near zero for some time even after ending quantitative easing and shifting to a more traditional policy of guiding short term rates.

With the U.S. Federal Reserve and the European Central Bank already on a rate-rise campaign, a BOJ policy shift would signal that cheap money around the world is starting to dry up.

Speculation that a change is nearing intensified after data released last Friday showed a surge in consumer prices, likely marking an end to seven years of debilitating deflation.

The BOJ wants to end the policy of force-feeding the banking system with funds -- measured by the balance of current account deposits that financial institutions park at the central bank -- because maintaining it when the economy is heating up could spur inflation and cause bubbles in property and share markets.

Politicians, however, worry that doing so too soon could derail Japan's long-awaited economic recovery and that an eventual resulting rise in bond yields could raise government borrowing costs and hamper efforts to trim the nation's bulging public debt, now at 150 percent of gross domestic product.

Government jawboning this week somewhat cooled the speculative fever and markets are marking time until the BOJ meeting ends on Thursday.

Data on Wednesday provided further evidence of an improving economy. The balance of outstanding bank loans rose 0.2 percent in February from a year earlier, suggesting a five-year decline in bank lending is ending as loan demand picks up, while money supply for the month expanded 1.7 percent.

PROMPT END BOJ

Governor Toshihiko Fukui fuelled speculation of a policy shift by telling parliament in late February that the central bank would end its super-loose policy promptly after it determined that rises in consumer prices had stabilised.

Fukui said on Monday that the central bank had not yet made up its mind. The same day, Prime Minister Junichiro Koizumi warned the BOJ could not afford to make a mistake and derail Japan's hard-won economic recovery.

Japan's economy grew at a blazing 5.5 percent annualised rate in the final three quarters of 2005, in stark contrast to more than a decade of stagnation until a few years ago.

''If the lifting of monetary easing fails, it (the BOJ) cannot go back again. I am sure a wise decision will be made,'' he told a parliamentary committee at which the BOJ governor was present.

Analysts expect most of the policy board to follow Fukui's lead should he propose to change policy.

One hurdle, however, may be whether the board can form a consensus on guiding policy going forward.

While an inflation target is thought to be unlikely, the board is expected to debate the need for some sort of guidance for future policy as it sets the stage for higher short-term interest rates.

Two board members have said the BOJ should set a reference level for prices to stabilise inflation expectations, and thus interest rates, after the BOJ shifts policy.

But the majority of the board have been opposed to numerical targets out of concern that the central bank could lose flexibility in conducting policy.

REUTERS