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BOJ Should Cut Reserve Goal Gradually, Mizuno Says (Update5)

BOJ Should Cut Reserve Goal Gradually, Mizuno Says

June 2 (Bloomberg) -- The Bank of Japan should cut its target for reserves available to lenders and move toward ending its policy of pumping cash into the world's second-largest economy in a year, said Atsushi Mizuno, one of nine policy makers.

The bank should slash its target range for reserves to between 15 trillion yen ($138 billion) and 20 trillion yen and ``watch for a while how things develop,'' Mizuno, 45, said at a press conference today in Fukushima City in northern Japan.

The bank now makes between 30 trillion yen and 35 trillion yen in reserves available to lenders and holds interest rates at almost zero. It has vowed to maintain the policy until core consumer prices stop falling for at least a few months and policy makers are certain they won't resume their slide.

Mizuno's comments highlight a growing rift among board members over a policy aimed at ending more than seven years of deflation. Mizuno is the second member to say publicly the reserve target should be lowered. Toshikatsu Fukuma proposed a cut at a regular board meeting on April 5-6, according to minutes released last week. Three others, who weren't identified, said a cut could be an option.

``Mizuno is one of most hawkish central bank board members who seek a policy shift,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``We expect the central bank will hold off on a policy change until it can be sure consumer prices will show stable gains, probably in the third quarter of next year.''

Temporary Drop

Bank of Japan Governor Toshihiko Fukui, speaking in parliament today, said there is no change ``at all'' in the bank's commitment to the policy until deflation ends.

The Bank of Japan allowed the amount of money it pumps into the economy to fall below its target for the first time today in response to weaker demand for cash from lenders.

The bank refrained from adjusting the amount of money in the banking system at regular market operations at 9:20 a.m. and 12:50 p.m. today, causing the amount of money held at the bank by financial institutions to fall by 2.23 trillion yen ($20.6 billion) to 29.13 trillion yen.

The bank decided on May 20 that it may allow reserves to temporarily fall below its target as a stronger financial system means lenders have less need for cash. It was first time reserves fell below the target since the bank adopted its zero-rate policy in March 2001.

Policy makers voted to keep the target itself unchanged, saying any drop in reserves wouldn't represent a change in policy.

Bond Yields

The benchmark 1.3 percent bond due March 2015 fell 0.044 to 100.699 as of 5:03 p.m. in Tokyo, according to Japan Bond Trading Co., the nation's largest debt broker. Its yield rose half a basis point, or 0.005 percentage point, to 1.22 percent after falling to 1.195 percent, the lowest for 10-year yields since Feb. 26, 2004.

``A decline in reserves has been pretty much factored in the bond market,'' said Yasunori Kuroda, who helps manage yen fixed- income assets in Tokyo at Sompo Japan Insurance Inc., the nation's third-largest casualty insurer with 5.07 trillion yen ($46.9 billion) in assets.

Mizuno, a former fixed-income strategist at Credit Suisse First Boston in Tokyo, predicted that core consumer prices will probably rise as early as October. Core prices, which exclude fresh food, have risen in just one month since April 1998.

Cutting the target ``at a pace which won't have a negative impact on markets is okay,'' he said.

Economic Growth

Japan pulled out of its fourth recession since 1991 late last year. The economy expanded at a 5.3 percent annual rate in the first quarter, twice the pace expected by economists. The unemployment rate fell to the lowest in more than six years in April and household spending rose for the first month in three, according to government reports on May 31.

Mizuno said the central bank should be flexible in implementing conditions for a policy shift once it's sure an economic recovery is sustainable.

``Exports will recover and in the meantime, signs of a recovery will become clearer and the economy can overcome its lull,'' he said in a speech earlier today.

In a sign that demand for cash from lenders is ebbing as the economy improves, the central bank has failed to receive enough offers from banks to lend and sell securities at more than 60 daily money-market operations this year. The bank said the failures are a sign that banks no longer need the extra cash.

The central bank ``is not committed to sticking with the reserve target of between 30 trillion yen and 35 trillion yen until the conditions are met,'' Mizuno said. It would send wrong signals to the markets if the central bank revises the conditions for a policy shift now, he said.

To contact the reporter on this story:
Mayumi Otsuma in Tokyo at [e-mail]


LINK: http://www.bloomberg.com/apps/news?pid=10000101&refer=japan&sid=a5JGvIS7A9oo