BOJ refuses to ease policy, sends dollar down.

TOKYO, Sept. 21 Kyodo

The Bank of Japan (BOJ) refused to buckle under growing pressure to further ease its ultraeasy monetary policy, with its Policy Board voting Tuesday to keep it unchanged.

The news sent the dollar plunging against the yen, and BOJ Governor Masaru Hayami gave a news conference after the policy board meeting, saying "monetary policy does not have stabilization of exchange rates as its objective."

Speculation was rife that the United States has agreed, at Japan's request, to jointly intervene in the currency market to stem the yen's rapid appreciation on condition that Japan take some easing actions.

The appreciation of the yen is seen increasingly as an obstacle to Japan's fragile economic recovery, as it hits the earnings of Japanese companies that rely on exports.

Hayami denied that speculation, saying he was not instructed to take any monetary policy action by the U.S.

He defended the board's decision of not easing policy further, saying under the current zero percent interest rate policy the central bank has been injecting ample liquidity into the banking system.

Hayami said he does not expect an additional easing step to have any impact.

But the BOJ's action prompted pressures to sell the dollar for the yen, sharply pushing the U.S. currency below 105 yen overseas, down from 107.90-93 yen late Monday afternoon.

Officials at the Finance Ministry were apparently discouraged by the BOJ's decision to keep policy unchanged, as a decision for an easier stance, they believe, would have helped ease pressures on the yen.

They fear that Japan will face tough demands to keep its economic recovery alive at Saturday's meeting of Group of Seven (G-7) finance ministers and central bankers.

After its policy board meeting, the BOJ said in a released document that the central bank agrees with the government about the impact the recent sharp rise of the yen could have on corporate earnings and other matters.

But the central bank said if monetary policy is directly linked with exchange rate controls, there will be high risk of making wrong policy judgments.

As for rising expectations of an easier stance by expanding the quantitative monetary base, the BOJ discounted the impact of such action, saying "an additional liquidity injection (into the economy) may have an effect but it will only be once and will not last long."

The bank then noted that under the zero interest rate policy and with the BOJ's ample liquidity injection, financial institutions are apparently feeling that funds are always available at almost no cost, and these institutions are therefore not motivated to take in funds.

This has led to 70-80% of the excess liquidity the BOJ supplies to the banking system being stocked at money brokers, the central bank said.

In some instances, financial institutions do not respond to the BOJ's money market operations even if the central bank offers funds at almost no interest, the BOJ said.

The BOJ also rejected the suggestion of "unsterilized" market intervention where it would leave yen funds in the banking system after it sold the Japanese currency in the exchange market to stunt the yen's gains.

Currently, the BOJ withdraws funds used for exchange market operations within a few days to neutralize the impact on fund liquidity.

Yasunari Ueno, chief market economist at Fuji Securities Ltd., hailed the BOJ's action, saying the central bank did what it was supposed to do by rejecting the call to set monetary policy for the sake of exchange rates.

"The yen's recent gain is a reaction to the Finance Ministry's massive intervention (a few month earlier) and is not created by the BOJ," he said.

"As the BOJ has already been supplying ample funds into the market, quantitative easing would not have any effect," he said.

Having seen the option of an easier stance rejected, Finance Minister Kiichi Miyazawa said of the decision, "The BOJ confirmed its monetary policy after hearing various views both in and out of Japan."

He spoke to reporters after a meeting of top Finance Ministry officials following the BOJ's decision.

The meeting was also attended by Haruhiko Kuroda, vice minister for international affairs, and Toshiro Muto, head of the Budget Bureau, ministry officials said.

Miyazawa said, "We don't know what will happen at the G-7 meeting until we go there."

Government sources say Miyazawa will not have much to offer at the G-7 meeting, maybe only a fiscal policy stimulus such as the promise of a major supplementary budget during the fall session of the Diet.