MNI: BOJ Masai: Must Watch Both Costs, Benefits of Easing

     KOBE, Japan, (MNI) - The Bank of Japan must watch both the costs and

benefits of the aggressive monetary easing it has been conducting since April

2013, BOJ board member Takako Masai said Wednesday.

     In a speech to business leaders in Kobe City, western Japan, Masai also

said the central bank needs to keep real interest rates at low levels in order

to stimulate economic activity and guide low inflation, still below 1%, to a

stable 2%.

     "In order to achieve the 2% price stability target in our country, we need

to wipe out the deflationary mindset and establish, for the entire society, the

norm that prices and wages will rise about 2% every year," she said.

     As to why the BOJ thinks it is necessary to lower interest rates to very

low levels, Masai said the basic mechanism of monetary policy is to keep real

interest rates below the natural rate of interest, which is neutral to growth

and inflation.

     "The natural rate of interest in Japan has been trending down, reflecting

the decline in the potential growth rate of the economy," she said, adding that

BOJ staff estimates the natural rate of interest is around zero.

     The BOJ has so far failed to achieve the 2% inflation target because the

deflationary mindset among households and businesses has been more stubborn than

expected.

     "Having said so, I think there is no change to the need for conducting

strong monetary easing -- that is, to keep real interest rates well below the

domestic natural rate of interest," Masai said.

     "On the other hand, since it has been nearly five years since the

quantitative and qualitative monetary easing was introduced, we must carefully

watch both its effects and side-effects,"

     She didn't say what side-effects the BOJ needs to monitor but other board

members have said keeping super-low interest rates too low is squeezing profit

margins for lenders, which could hurt the financial intermediation function.

     At their last policy meeting on Oct. 3-31, many BOJ board members saw no

need to reinforce already large-scale monetary easing, arguing that resulting

side-effects of additional accommodation would exceed the benefit, the summary

of opinions at the meeting released last month showed.

     At the October meeting, the BOJ board decided in an 8-to-1 vote to maintain

its current monetary easing stance under the yield curve control framework it

adopted in September last year.

     In addition, weak price data prompted the board to lower its projections

for consumer prices in fiscal 2017 and 2018, but the BOJ stuck to its latest

timeframe that it can achieve its 2% inflation target "around fiscal 2019"

ending in March 2020.

     Under the yield curve control framework, the BOJ is seeking to stabilize

the 10-year government bond yield, the benchmark for long-term borrowing costs,

at around zero percent and keep the overnight interest rate at -0.1%.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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