A split within the Bank of Japan was laid bare on Monday, with newcomers to its board pressing to strengthen commitment to an ultra-loose policy, as pressure on the central bank for bolder action intensified in the run up to next month's election.
In an effort to shift the debate away from the central bank, BOJ Governor Masaaki Shirakawa repeated his view that monetary easing alone cannot beat deflation, urging the government to pursue fiscal reform and deregulation to boost domestic investment.
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But minutes of the October 30 meeting of the nine-member board released on Monday showed Takehiro Sato, one the newcomers, had suggested a more activist stance on monetary expansion once Shirakawa's term ends in April.
The conduct of policy became one of the most heated areas of political debate ahead of the December 16 election after Shinzo Abe, the leader of the opposition Liberal Democratic Party (LDP) and likely next prime minister, called for the central bank to adopt negative interest rates and other radical measures.
Abe also threatened to take away the BOJ's independence to allow the government to call the shots on targets and the means to achieve them.
Sato, a former economist who has consistently called for more BOJ measures to keep yen rises in check, proposed linking monetary policy more closely to a rise in consumer prices and suggested giving up the BOJ's view that consumer inflation will approach 1 percent in the fiscal year ending in March 2015.
The minutes of the meeting showed Takahide Kiuchi, another former economist who joined the board with Sato in July, was alone in his support for the proposal, showing that their views lacked broad support at least for now.
"A few members raised the issue of whether it was possible to further exert influence on interest rates and demonstrate the BOJ's clearer stance on monetary easing by changing the current wording," the minutes showed.
"Most members expressed a cautious view regarding making changes to the wording of the policy commitment at this point."
At last month's meeting, the BOJ eased policy by boosting its asset-buying program by 11 trillion yen ($133.5 billion), to 91 trillion yen. It also unveiled a plan to supply banks with unlimited cheap long-term funds under a new scheme initially seen sized around 15 trillion yen.
But that has not eased pressure on the BOJ.
Investors have bet on bolder monetary easing by the BOJ as Abe repeated calls for "unlimited" policy loosening, which drew strong opposition by incumbent prime minister and ruling party leader Yoshihiko Noda.
A weekly gauge of sentiment in the Japanese government bond market worsened to a level unseen in nearly five months on speculation of more aggressive easing following a likely change in government after the election.
Shirakawa left few clues on how soon the BOJ will next ease policy but warned of the pain a strong yen was inflicting on the export-reliant economy, signaling readiness to act again should Japan slip deeper into recession.
"We'll conduct policy mindful of the effect yen rises will have on the economy and prices," he said in a meeting with business leaders in the Chubu central Japan region, home to automobile giant Toyota Motor Corp.
Some market players expect the BOJ to ease again at its next rate review on December 19-20, days after the general election.
QUESTION OF DEGREE
A Reuters poll last week showed most economists believe Japan is already in a mild recession due to faltering global demand but a recovery is seen early next year.
The LDP's Abe, who was last prime minister in 2007, is calling for far more aggressive monetary measures to revive the struggling economy, including a commitment to an inflation target of 2 percent to overcome deflation.
Sato proposed that the BOJ should say it will maintain ultra-easy policy until a 1 percent rise in consumer prices has been maintained, which is stronger that the BOJ's current commitment to maintain strong monetary stimulus until 1 percent inflation can be foreseen.
Shirakawa suggested that he saw no need to change the language now, saying that markets already expect ultra-easy policy to continue for a long time even under the existing policy pledge.
He also refused to be drawn into the political debate, repeating that he has made clear his response at last week's news conference when he turned down most of the demands as unrealistic.
"Japan's consumer inflation may gradually exceed 1 percent if government and private-sector efforts to boost Japan's growth potential bear fruit," he told reporters after the meeting with business leaders.
The BOJ now sets a 1 percent inflation target and sees as desirable medium- to long-term price growth in a range of zero to 2 percent.
Japan's main opposition LDP kept its clear lead ahead of the election, opinion polls showed on Monday, with the hawkish Japan Restoration Party (JRP) led by a nationalist ex-Tokyo governor running second.
($1 = 82.3850 Japanese yen)
(Writing by Leika Kihara; Editing by Simon Cameron-Moore & Kim Coghill)