Summary of July Meeting by Reuters

By Leika Kihara

TOKYO (Reuters) – On Monday, significant differences emerged among the members of the Bank of Japan’s board regarding monetary policy. While some members advocated for continued unlimited monetary easing, others contended that the bank had already done enough, warning that its actions were causing considerable market volatility and diminishing liquidity in the bond market.

This discussion highlights the difficulties the central bank faces as it seeks to tackle persistently low price growth and ongoing economic weakness with a limited array of policy tools.

One board member emphasized the need to disregard the notion that monetary easing has limitations and potential negative side effects, suggesting that the only constraint on Japan’s government bond purchases would be the total amount of bonds issued. Another member stressed the importance of conducting a thorough evaluation to determine the best approach to achieve the target of 2 percent price stability as soon as possible.

In a potentially positive development, a government survey indicated on Monday that sentiment in the service sector improved in July after hitting a two-year low in June, which had been influenced by Britain’s decision to leave the European Union. The government revised its assessment of the service sector’s mood for the first time in 16 months, indicating it was “showing signs of a pick-up.”

At the recent meeting held on July 28-29, the BOJ responded to government and market calls for more vigorous action by expanding its stimulus measures, specifically by doubling its purchases of exchange-traded funds (ETFs). However, this move did not meet the higher expectations from the market.

Looking ahead, the BOJ plans to evaluate in September the impacts of its negative interest rates on certain bank deposits and its extensive asset purchasing program – hinting that significant changes to its stimulus strategy might be forthcoming.

Board members Takehiro Sato and Takahide Kiuchi, both economists, disagreed with the decision to increase ETF purchases, warning that it could distort market functions and subject the bank’s balance sheet to higher risks. One member raised concerns that increasing ETF purchases signals that monetary easing may be nearing its limits and that such an incremental approach could foster ongoing expectations for additional easing.

The summary of the discussions from July did not provide any specific hints regarding potential policy actions stemming from the BOJ’s upcoming evaluation of its stimulus measures.

Some analysts predict that the BOJ may implement further easing during its next rate review on September 20-21, contingent on the results of its assessment.