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The Bank of Japan's board members unanimously agreed that further steps likely would be required to hold deflationary pressures at bay, minutes for the BoJ's unscheduled monetary policy meeting on December 1 revealed on Friday.
The members also agreed that business sentiment was continuing to worsen, due mainly to deflation and a strengthening yen. They decided that lowering long-term rates may help the economy.
"Members shared the view that the Bank should implement an additional monetary policy measure to provide support for Japan's economy to overcome deflation and return to a sustainable growth path with price stability," the minutes said. "Many members said that, specifically, given that the overnight call rate had been virtually at 0 percent, encouraging a further decline in interest rates on term instruments in the money market would be most effective in further supporting the economic recovery from the financial side."
To that end, the central bank also decided to further enhance easy monetary conditions by introducing a new fund-supplying operation to encourage a further decline in longer-term interest rates.
It decided to lend commercial banks three-month funds at 0.1% fixed-rate. The central bank will accept Japanese government bonds, corporate bonds, commercial paper and loans on deeds as eligible collateral.
"The Bank has judged that, in supporting the economic recovery from the financial side, it is most effective at present to further spread the strong effects of monetary easing and encourage a further decline in longer-term interest rates in the money market through provision of ample longer-term funds at an extremely low interest rate," the minutes said.
The central bank also released the minutes from its December 17-18 policy meeting, in which the board members said that a clear stance on inflation may help to stabilize interest rates.
The central bank retained its assessment of the economy, saying that the Japanese economy is picking up mainly due to various policy measures taken at home and abroad, although there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand.
"The financial environment, with some lingering severity, had continued to show signs of improvement," the minutes said. "The overnight call rate had remained at an extremely low level, and firms' funding costs had declined somewhat. The stimulative effects from low interest rates were still constrained by the low levels of economic activity and corporate profits, but the degree of constraint had begun to moderate."
The central bank said upside risks for economic activity could stem from developments in emerging and commodity-exporting economies, while at the same time there are downside risks too. Downside risk factors include the possible consequences of balance-sheet adjustments in the U.S. and Europe as well as potential changes in firms' medium- to long-term growth expectations. Further, the BoJ said there remains a risk that the inflation rate might decline due to a fall in medium-to long-term inflation expectations.
"Members agreed that the economy was likely to continue improving as exports and production would probably remain on an uptrend," the minutes said. "Some members, however, said that the pace of improvement was likely to slow through the middle of fiscal 2010, since the effects of inventory restocking and economic stimulus measures were likely to wane."
At both meetings, the central bank kept interest rates on hold at the current record low of 0.10 percent.
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