Minutes show BOJ’s stalled efforts to normalize policy in 2007

January 29, 2018

Tokyo- The Bank of Japan's efforts to further normalize its monetary policy after ending years of quantitative easing were pushed into a deadlock in 2007, with policymakers divided over the pace of possible interest rate hikes amid the US subprime mortgage crisis, according to the minutes of the BOJ's policy meetings released on Monday.

In March 2006, the BOJ terminated its quantitative easing policy, under which it supplied massive funds to the banking system, and switched back to the unsecured overnight call rate for its monetary policy target.

The central bank then explored opportunities to raise the rate in stages. It first increased the rate from zero, set in March 2006, to around 0.25 percent in July in the same year and to around 0.50 percent in February 2007.

At the BOJ Policy Board's meeting in July 2007, Atsushi Mizuno, a then member of the board, proposed lifting the overnight call rate to 0.75 pct from 0.50 percent, claiming that conditions for the increase were fully met.

Hidetoshi Kamezaki, another member, supported the proposal, saying that the BOJ was coming to a point where it should consider adjusting interest rate levels.

But the board did not make a rate hike decision at the meeting, according to the minutes.

The subprime woes rippled through European financial institutions in August 2007 and eventually led to the collapse of US investment bank Lehman Brothers in September 2008 that exacerbated the global financial crisis.

Initially, however, a majority of BOJ policymakers at the time, including then BOJ Deputy Governor Toshiro Muto, believed that the subprime problem would have only a limited direct impact on Japanese financial institutions and financial markets.

At the Policy Board meeting in September 2007, then BOJ Governor Toshihiko Fukui said the central bank would gradually raise interest rate levels if the Japanese economy was to follow a sustainable growth path, stressing his eagerness for rate hikes. But the board failed to form a consensus at the meeting, the minutes showed.

When the board met in the following month, some members expressed caution about interest rate hikes. Among them, Kiyohiko Nishimura said the BOJ still had time before changing its policy. BOJ Deputy Governor Kazumasa Iwata said he did not think it was the best time to raise the rate.

Financial uncertainties lingered in the United States and Europe, and the Japanese housing market continued to slump.

As a result, the BOJ revised down its assessment of the Japanese economy at the December 2007 meeting for the first time since November 2004.

Mizuno proposed raising the policy rate at each of the Policy Board meetings held in July-November 2007, but withdrew the proposal at the December meeting. Jiji Press