Kuroda excludes for the moment the rise in rates and is worried about the structural difficulties of the banks

NAGOYA, Japan (Reuters) – Bank of Japan Governor Haruhiko Kuroda has ruled out the possibility of a rise in short-term interest rates, saying that heightening the pressure on financial institutions by threatening to compromise the economic recovery of the country.

While Kuroda said the BOJ would be more aware of the rising cost of protracted stimulus measures, he saw "no reason" to now follow in the footsteps of his US counterpart with regard to the normalization of his policy, the inflation is still far from its target of 2%.

Kuroda has conceded that Japanese regional banks could see their business environment deteriorate by five to ten years, when they ran out of assets to sell to offset the contraction in profits from core lending. .

But their situation is less related to BoJ policy than to structural problems such as a dwindling population and a lack of funding, Kuroda said.

"These long-term problems deserve attention. But for now, rising rates and accelerating yield curve could hurt the economy and have an adverse effect on financial institutions, "Kuroda told a meeting after meeting with business leaders in Nagoya, central Japan.

"The problems (regional banks) are facing are structural, so the measures they take must be too," with mergers and integration between stages that they could to adopt, he said.

The comments suggest that the central bank will refrain from raising rates for the moment and will only slightly alter its program if necessary to cope with the rising costs of easing.

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 grow, revealed the minutes.

Kuroda said 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.

"Unlike in the past, Japan is no longer in a situation where a decisive large-scale policy is needed to overcome deflation," he said in a speech to the heads of state. the company in Nagoya, thus ruling out the possibility of deploying another considerable stimulus program, even if the economy deteriorates.

"It is necessary to persistently maintain a strong monetary easing while analyzing the positive effects and the side effects in a balanced way."

TARGET OF INFLATION FLEXIBLE?

Controlled inflation has forced the BOJ to maintain its drastic stimulus package even as 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.

Some MPs have said that the BoJ should not insist on achieving an inflation rate of 2% and start thinking about ways to normalize economic policy.

At the meeting with Kuroda, Ado Yamamoto, head of the corporate lobby in Nagoya, said the central bank should start developing a strategy to end its crisis policy.

Kuroda dismissed the opportunity to unveil an exit strategy now, saying it could be counter-productive and that inflation would only be half of the BOJ's goal.

But he said he did not expect the ultra-easy policy to last for years, adding that the central bank was not insisting on reaching the price target at all costs.

"It's true that our price target can still be changed," Kuroda said.

"We are not trying to reach our target price target all the time."