BoJ cutting target option for future

The Bank of Japan could discuss lowering its liquidity target once it is clear that this would not be interpreted as a monetary tightening, but the time to move is still some way off, a BoJ board member was quoted as saying. Hidehiko Haru said that for now the central bank could achieve its current account deposit target, the cornerstone of its ultra-easy monetary policy, by fine-tuning its market operations, the Sankei Shimbun daily reported on Tuesday.
The BoJ has said it will not end its "quantitative easing" policy until consumer prices show a consistent rising trend.
But talk has increased that the target may be cut before then because weaker demand for funds by banks has made it more difficult for the BOJ to achieve its aim of maintaining the balance of deposits it holds for them at 30-35 trillion yen ($280-$326 billion).
Demand for short-term funds by the banks has waned along with concerns about the chances of a crisis in the banking system.
"Even if there is a temporary breach of the target, it is important for the BoJ to quickly bring it back within the target range and maintain the target," Haru was quoted as saying.
"But depending on changes in the situation in the future, we could discuss carefully lowering the target based on market conditions while maintaining our quantitative easing framework, as some board members have pointed out," Haru said.
"Lowering the target could be an option once such a move by the BOJ would not be interpreted as having a negative impact on overcoming deflation or would not be interpreted as monetary tightening," he said.
Under the BoJ's quantitative easing policy, the central bank provides some five-to-six times more liquidity to the market than banks need and keeps short-term interest rates near zero.
Haru said the end of full protection for bank deposits on April 1 would be a key step in improving the credibility of Japan's financial system, but it did not mean the BOJ could shift monetary policy right after that.
Haru said while he expected consumer prices to keep falling slightly on year-on-year basis during 2005, "the possibility was high" for the core CPI to stabilise above zero in fiscal 2006/07 starting in April next year, the daily reported.
When considering ending the quantitative easing in the future it will be important to consider the pace of rises in the CPI, actual levels, the sustainability of higher prices and economic conditions at that time, including land prices, Haru said.