6 December 2002, 08:56  BOJ May Pump More Cash Into Economy, Board Member Ueda Says

/www.bloomberg.com/ By Mayumi Otsuma and Masahiro Hidaka
Tokyo, Dec. 6 (Bloomberg) -- The Bank of Japan would consider proving more cash to lenders by increasing purchases of their government bonds if the world's second-largest economy threatened to fall into another slump, a policy maker said.
``If there is a risk the economy will get into worse shape, that might prompt the government to do more,'' Kazuo Ueda said in an interview. ``Then we, the central bank, will consider harder what we can do.''
There is scope for the central bank to increase monthly bond purchases beyond the current 1.2 trillion yen ($9.6 billion), said Ueda, a former Tokyo University economics professor and one of nine central bank board members.
The central bank is under pressure to stop a four-year slide in prices and keep Japan's economy from slipping into a fourth recession in a decade. Governor Masaru Hayami has pledged to keep interest rates near zero and pump money into the banking system until prices stop falling.
Even so, there's no need to buy foreign bonds or stocks to provide cash to the money market, as some politicians have suggested, Ueda said. He said he couldn't comment on how the bank would handle these issues in the future.
Prime Minister Junichiro Koizumi is also under pressure to do more to shore up the economy. Last month he decided to spend 3 trillion yen more in the fiscal year to March 31 on public works, job-creation projects and subsidies for small companies -- forcing him to abandon a pledge to cap new bond sales.
Kuroda Essay
Haruhiko Kuroda, vice finance minister for international affairs, said this week the central bank should increase the supply of money by buying more government bonds and other financial assets.
The bank should also set ``an explicit inflation target of 3 percent to be achieved in stages, such as 1 percent inflation within a year and 2 to 3 percent within the following two years,'' Kuroda said in an essay published in the Financial Times Monday, which he wrote together with his deputy, Masahiro Kawai.
Ueda said the central bank had expanded bond purchases and cash injections -- taking ``almost the same line'' Kuroda proposed in his essay. The bank's pledge to keep rates almost at zero until prices rise is ``also an inflation target, in a broader meaning,'' Ueda said.
``We are not saying we will stop here,'' Ueda said. ``We can say the same thing about the bank's bond purchases.''
No Rush
Even so, Ueda said the central bank shouldn't rush to buy more bonds. If investors thought the bank would buy ever more government debt, that might eventually push up yields by fueling expectations for inflation, he said.
That's why the central bank should maintain the principle that bond purchases be limited by the amount of paper money in circulation.
``The limit is set to avoid such speculation and stabilize investors' confidence,'' Ueda said. ``There is no change that we need the limit.''
Some investors say the bank may be forced to abolish the limit in response to pressure to buy more bonds and provide more money to markets.
Some politicians are urging the central bank to buy foreign- currency denominated bonds and stocks from lenders. Governor Hayami has opposed those suggestions.
Opponents say buying foreign bonds and stocks could expose the central bank to losses if their prices declined. Such losses would have to be paid by taxpayers if the government had to replenish the central bank's capital.
``That's an important issue,'' Ueda said. ``However, we won't decide whether to adopt certain money-market operations just by weighing concerns about the bank's balance sheet.''

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