The Bank of Japan should maintain its policy of keeping rates at zero and pumping money into the world's second-largest economy because deflation hasn't been stamped out, Finance Minister Sadakazu Tanigaki said. ``There are some voices urging the Bank of Japan to exit the current policy, but we shouldn't rush to seek such an exit,'' he said in an interview in Tokyo. ``The government and the Bank of Japan must continue to work together to overcome deflation.''
Central Bank Governor Toshihiko Fukui announced monetary policy would stay unchanged today and repeated the bank's commitment to ending deflation. Analysts including Masuhisa Kobayashi predict that the Bank of Japan will end its policy of ``quantitative easing,'' under which it floods the banking system with money to encourages them to lend, as early as June next year as a rebounding economy supports prices. ``We suspect the BOJ has two faces -- one is to emphasize its commitment to sticking to the quantitative easing policy, and the other is to shift its policy stance to neutral little by little,'' said Kobayashi, a fixed-income strategist at Merrill Lynch Japan Securities in Tokyo.
A two-year economic recovery hasn't ended six years of falling prices. Japan's economy expanded at an annual 5.6 percent pace in the first quarter, making it the fastest growing in the Group of Seven nations, while prices fell 2.6 percent from a year earlier, the government reported this week. The bank pumps money into the economy through purchases of 1.2 trillion yen ($10.6 billion) of government bonds from banks each month. Policy makers also voted unanimously today to keep the level of bond purchases unchanged and to keep the upper limit of reserves available to lenders at 35 trillion yen.
`No Plans'
``Right now we have no plans to revise the commitment we've made,'' to keeping rates at zero until prices stop falling for at least a few months and policymakers are sure they won't resume their slide, Fukui said today. The central bank last raised interest rates in August 2000 under Governor Masaru Hayami in the face of opposition from the finance ministry and lawmakers. Seven months later, the bank lowered rates to zero again as Japan's economy slumped after the global technology bubble burst. Policy makers need ``more effective measures'' to end deflation, Tanigaki, 59, said. He said he'll meet Fukui tomorrow to exchange views on the economy. Prime Minister Junichiro Koizumi and Economic and Fiscal Policy Minister Heizo Takenaka will also take part, he said. The benchmark 1.5 percent bond due March 2014 rose, pushing its yield down 2.5 basis points to 1.465 percent at the 6:05 p.m. close of trading in Tokyo. A basis point is 0.01 percentage point.
Yen Sales
Recent moves in exchange rates have reflected economic fundamentals, he said. He added that Japan's record yen sales in the fiscal year to March 31 were intended to prevent deflation from hurting the economy. The yen was at 113.24 at 11:18 a.m. in London from 113.13 late yesterday in New York. The yen has fallen more than 8 percent from a four-year peak of 103.40 to the dollar on March 31. Gross domestic product expanded 3.2 percent in the fiscal year to March 31, the fastest pace in seven years. In the same period, the government sold a record 32.9 trillion yen in a bid to slow the currency's 13 percent advance against the dollar and protect the export-led recovery.
Tanigaki denied speculation that the government might have sold part of its foreign reserves for yen. Japan's April foreign reserves, which track the government's securities and deposits with overseas central banks, fell to $795.4 billion from $806 billion in March. That was the first decline since August.
Hiring
Japan may need to study changing the mix of its foreign reserves over the long term, he said, adding that it must first consider the potential market impact of such a move. ``Japan's economy continues to recover gradually, and domestic demand is becoming firmer,'' the Bank of Japan said today, leaving its monthly economic assessment unchanged. It said exports are ``increasing substantially.'' Hiring by manufacturers including Toyota Motor Corp. pushed unemployment to a three-year low of 4.7 percent in March. Consumers, whose spending makes up half the world's second-largest economy, are cutting Japan's reliance on exports. ``Consumer prices are projected to continue falling slightly,'' the central bank said today. ///www.bloomberg.com