The Bank of Japan's policy board voted 7 to 2 to keep monetary policy unchanged at a meeting Feb. 25, deciding to gauge the effect of its interest rate cut two weeks earlier, according to minutes of the meeting.

On Feb. 12 the central bank unexpectedly slashed its target for the interbank overnight loan rate, which is equivalent to the U.S. federal funds rate, by 10 basis points, to 0.15%. The rate cut was aimed at countering deflationary pressure and averting surges in bond yields and the yen's value on currency markets.

The bank has since guided the overnight loan rate effectively to zero. Some investors and traders had expected the central bank to announce additional policy-easing steps Feb. 25, but its board kept policy stable then and at the two March meetings.

According to the minutes of the Feb. 25 meeting, "the majority of members were of the opinion that the Bank of Japan should maintain the guideline for money market operations decided at the previous meetings for the immediate future."

Two board members, Nobuyuki Nakahara and Eiko Shinotsuka, dissented. Mr. Nakahara, a former president of oil refiner Tonen Corp., said the central bank should take further policy-easing steps as soon as possible to help mend the weak economy.

Mr. Nakahara proposed that the central bank achieve an annual 10% growth rate for the base money supply-currency in circulation plus reserves at the central bank-as part of a policy of "quantitative easing." To achieve this, he said, the bank should maintain excess reserves of about 500 billion yen, or $4.12 billion, and gradually increase the amount.

He also proposed that the central bank achieve an annual increase of 1% in the consumer price index, targeting inflation at a rate of 0% to 2% for 1999 and 0.5% to 2% for 2000. Japan's CPI fell 0.1% in February from a year earlier. Mr. Nakahara's proposals were turned down by the board, with six members voting against them and one abstaining. At the Feb. 12 meeting, Mr. Nakahara had proposed a policy of quantitative easing in which the central bank would pump trillions of yen into the banking system to encourage money supply growth. A few members said they doubted quantitative easing would be appropriate, according to the Feb. 25 minutes.

"It was wrong to think that quantitative targeting was just another means of monetary policy the Bank of Japan could employ, having used up all interest rate policy measures," one member said.

Yet at least two members suggested the central bank should consider the possibility of using quantitative easing, the minutes said. Bank of Japan Governor Masaru Hayami recently said the bank needs to observe the flow of funds in the financial markets for a while but that the central bank won't rush to adopt a new policy tool.

He said the board has discussed the possibility of using new tools, including yields on money market vehicles and quantitative easing.

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