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A rift within the Bank of Japan's board over how to steer its radical monetary stimulus to end nearly two decades of damaging deflation underlined the early challenges Governor Haruhiko Kuroda faces in his efforts to foster sustained growth.
The differences of opinion were highlighted in the minutes of the April 26 meeting, which showed some policymakers opposed targeting 2% inflation in two years and called for more flexibility in guiding monetary policy.
The board also engaged in considerable debate over the recent bond market volatility that followed the BOJ's monetary easing on April 4, a sign the members were uneasy about the rise in borrowing costs that could undermine the central bank's ultra-loose policy.
"We're still seeing potential instability in the bond market," one member was quoted as saying in the minutes released on Monday.
The rift and the market volatility, which also hit Tokyo shares, pose a challenge to Prime Minister Shinzo Abe's sweeping monetary and fiscal expansionary policies aimed at reviving Japan's long-dormant economy.
They also underscore concerns, even within the BOJ, over the central bank's stimulus plan that relies heavily on lifting sentiment and creating expectations of future inflation and growth.
"Given how extreme the April easing step was, it's natural for disagreements to exist within the BOJ," said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo.
"Failure to meet the price target will test the BOJ's credibility. But the bank's policy itself is contradictory. When expectations of inflation heighten, bond yields will rise. The BOJ can't really do anything to stop that."
The BOJ unleashed the world's most intense burst of stimulus last month, promising to inject $1.4 trillion into the economy in less than two years to meet its pledge of achieving 2% inflation in roughly two years.
At a subsequent meeting on April 26, the BOJ extended the period for its economic forecasts to three years and said Japan will likely approach 2 % inflation in the latter half of the three-year period to March 2016.
Among the nine-member board, former economists Takahide Kiuchi and Takehiro Sato dissented against the new forecasts on the view that they were too ambitious in a country that has been mired in deflation for 15 years.
"A few members said it was tough to achieve 2% inflation in the latter half of the forecast period as there is uncertainty over how changes in future inflation expectations will actually push up prices," according to the minutes, which likely referred to Kiuchi and Sato.
One of the two said the credibility of the BOJ's policy would be hurt if the central bank made forecasts bound with uncertainty and failed to achieve them, the minutes showed.
Both made unsuccessful proposals to water down the BOJ's commitment to meet 2 % inflation in two years. Kiuchi said the central bank should limit the period for committing to its ultra-easy policy for two years, and review it thereafter to see whether it should be sustained.
SENTIMENT SOURING?
At the April 26 meeting, the BOJ voted unanimously to stick with the massive easing announced three weeks earlier, in which it pledged to double its Japanese government bond (JGB) holdings in two years as it expands the supply of money at an annual pace of 60 trillion to 70 trillion yen.
While the aggressive stimulus has sent stocks soaring, the massive scale of the BOJ's buying jolted the bond market and nudged the 10-year yield to its highest level in a year last week, casting a cloud over the effectiveness of its easing.
A decline in bond prices would hit the balance sheet of many Japanese banks that have heavily loaded up on bonds, and increase the cost of financing Japan's huge debt pile, already the biggest in the developed world at more than double the size of its economy.
Moreover, the biggest danger for Japan is the potential loss of investor confidence, as policymakers are counting on changing perceptions to create a virtuous circle of consumption, bigger company profits, investment, higher wages and growth.
Kuroda has played down the risks, saying on Sunday that banks have sufficient buffers against losses they may incur from rises in bond yields.
The bond market turbulence, however, was among the key topics at the April 26 meeting, suggesting that it was making some policymakers jittery.
A few members said the turbulence was due to a tug-of-war between downward pressure on yields from the BOJ's huge bond buying and upward pressure from expectations the BOJ will meet its price goal at an early date, the minutes showed.
Some board members called for the need to continue examining steps to prevent a decline in liquidity in the JGB market that was blamed for the bond market volatility, the minutes showed, although they did not discuss any details or likely new ideas.
The BOJ hopes to soothe market jitters by pumping money via market operations and enhancing communication with investors. It will hold a meeting with JGB market participants for this purpose on Wednesday.
