Govt urged zero rates post-BOJ policy move-minutes

TOKYO, Apr 14 (Reuters) The Bank of Japan was urged by the government to keep interest rates at zero when it scrapped its ultra-easy monetary policy last month, but the central bank noted the risks of policy becoming too accommodative, minutes of its board meeting showed on Friday.

The nine-member board decided at its March 8-9 meeting to abandon its unique five-year-old policy of flooding the banking system with excess funds and to revert to a conventional policy of targeting interest rates. It left rates around zero.

Minutes to the meeting showed a representative of the Ministry of Finance urged the board to support the economy by maintaining zero interest rates when it shifted policy course and to make sure financial markets stayed stable.

''The government would like the Bank to support the economy from the financial side responsibly to prevent the economy from weakening again, bearing in mind that ensuring the sustainability of the economic recovery and overcoming deflation were important policy tasks,'' the minutes quoted the official as saying.

Markets have been speculating that the central bank could raise interest rates for the first time in six years as early as July, but economists say government concerns about a premature tightening could delay a move.

The government is worried that a rise in short-term interest rates could spark a jump in longer-term rates, chilling economic growth and complicating its efforts to finance huge fiscal debt.

The yield on the 10-year Japanese government bond (JGB) struck a 5-1/2-year high on Friday, partly because of growing fears the BOJ will soon start turning the screws on cheap money.

The meeting, however, showed that the government respected the BOJ's decision to shift policy and the move faced just one dissenter from the board -- policy dove Shin Nakahara.

Most members of the board said the BOJ's condition for ending its ultra-easy policy, a sustained rise in the core consumer price index, had been fulfilled and the trend would not change even if they postponed the decision for a month or two.

The minutes also showed that a few board members called for future policy to be forward-looking, with members agreeing there were risks for the economy as the effects of accommodative policy strengthened.

''It should be noted that over the medium to long term there is the risk of swings in economic activity becoming bigger as the stimulus from monetary policy grows against the backdrop of improving corporate profitability and a turnaround in prices,'' the minutes quoted board members as agreeing.

A few members said BOJ would also need to examine risks such as high inflation, a speculative bubble or a deflationary spiral, although the chances of those risks materialising were low.

REUTERS PV BS1235