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By Leika Kihara
NAGOYA, Japan (Reuters) – Bank of Japan Governor Haruhiko Kuroda reiterated that policymakers would be more aware of the rising cost of long-term stimulus, although the head of the central bank dismissed any rising interest rates in the short term.
Kuroda said there was "no reason" for the BoJ to follow its US counterpart in normalizing its policy, with inflation staying away from its 2% target.
However, the governor said that in order to preserve monetary conditions, the BOJ should now focus more on the consequences of extremely low interest rates, such as tensions on financial institutions.
"The BOJ is fully aware that the continuation of monetary easing will affect the strength of financial institutions cumulatively," Kuroda said in a speech delivered Monday in Nagoya to business leaders.
"Although these risks are considered insignificant at this stage (…), the BOJ will closely monitor the situation and encourage financial institutions to take the measures that are required", a- he declared.
The remarks suggest that the central bank will maintain the status quo on monetary policy for now and will only make minor adjustments to its program when it will be necessary to cope with the rising costs of easing.
The key would be to make the BOJ's recovery program as sustainable as possible, so that it can continue to stimulate the economy without destabilizing the banking system, he said.
"Contrary to the past, Japan is no longer in a situation where a decisive large-scale policy is needed to overcome deflation," said Kuroda, dismissing the possibility of deploying another major stimulus package, even if the economy deteriorated.
"It is necessary to persistently continue with a strong monetary easing while looking at the positive effects and the side effects in a balanced way."
The rising cost of prolonged easing has been at the center of the BoJ rate review debates in September, a politician warned that there was a limit to the duration of the stimulus, showed the minutes published on Monday.
"One member said that it was possible to soften the political framework of the BoJ in the future" if the economy continues to develop, the minutes showed.
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Controlled inflation has forced the BOJ to maintain its drastic stimulus package even though years of low interest rates have hurt the profits of financial institutions and the drying up of bond market liquidity.
The central bank took steps in July to make its policy more sustainable, including allowing bond yields to move more flexibly around its zero per cent target. But the measures taken did little to relieve financial institutions.
"Profits from core lending could continue to fall, and in the long run, regional banks could see their economic environment deteriorate further," Kuroda said.
But the BOJ's policy alone can not solve the structural problems that are clouding the business prospects of regional banks, such as a dwindling population and a lack of demand for funding, he said.
"The BoJ will of course look to get out of its recovery plan when its 2% inflation target is reached.This will accentuate the yield curve and raise interest rates," he said.
"But that will not be enough to solve the banks' problems."
(Additional report by Stanley White in Tokyo, edited by Sam Holmes & Shri Navaratnam)
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