(Reuters) – Many Bank of Japan policy board members played up the effectiveness of extra monetary easing even as the economy recovers and deflation eases, the minutes of the BOJ’s mid-March meeting showed, suggesting it could loosen policy more in the months ahead.

Japan

At the March 16-17 meeting, the BOJ eased policy by doubling to 20 trillion yen ($214.7 billion) the funds available to banks for three-month loans at its policy rate of 0.1 percent, following a drumbeat of government pressure.

Still, companies remain reluctant to borrow from banks to boost capital spending, while bigger players are turning instead to the market for cash. Outstanding loans held by Japanese banks fell 1.8 percent in March from a year earlier — the fastest pace of decline in more than four years.

“Big companies can now tap the capital markets,” said Junko Nishioka, chief economist at RBS Securities in Tokyo.

“Fund demand will eventually recover as the economy recovers, but pressure on the Bank of Japan for further easing will remain as deflation is persisting.”

The BOJ minutes showed that many supported the additional easing move even though they were more optimistic about the economy and said the risks of a major slowdown in the first half of 2010/11 had receded.

Some also said a sustained recovery in domestic demand was possible if growth stays high in that period.

The continued recovery could lead the central bank to upgrade its economic assessment in its twice-yearly outlook report due out on April 30.

Many board members argued in March that boosting the size of the cheap fund supply tool adopted in December and thus further lowering interest rates beyond the overnight rate “would solidify improvements in the economy and prices,” the minutes showed.

The BOJ board held off on new policy initiatives at a subsequent meeting last week and gave a slightly more positive view than before on the economy, cooling expectations for further easing in coming months.

NODA, SUDA SAY EASING INAPPROPRIATE

The board’s decision in mid-March was by a split vote, which suggested that a divided board may not be so compliant in the face of government demands for easier monetary conditions.

Board members Tadao Noda and Miyako Suda opposed the decision and argued that the economic recovery did not justify more easing.

“The economy’s outlook is somewhat overshooting forecasts and prices are moving in line with (the BOJ’s) January forecasts, and there are no sudden moves in financial markets … Additional easing is inappropriate in view of continuity in communicating with markets,” Noda said.

One member said caution was needed over the impact additional easing would have on market functions, according to the minutes.

In a sign of continued pressure, a government representative urged the BOJ to ensure “more ample and smooth fund supplies in order to show its resolve to overcome deflation,” according to the minutes.

The BOJ board has now been joined by Ryuzo Miyao, an academic and expert on monetary policy, who told his first news conference in late March that monetary easing could boost growth even when the economy is picking up, suggesting he would not oppose more easing to beat deflation.

The BOJ’s nine-member board will be complete for the first time since 2008 when Yoshihisa Morimoto, a director at Japan’s largest power company, joins in July.

(Editing by Hugh Lawson)