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TOKYO (MNI)

The Bank of Japan may need to maintain its easy policy for a longer than expected period, forcing it to consider further measures to mitigate the impact of the negative rate policy on banks' profitability, MNI understands.

Bank officials are currently considering future monetary policy options, with the assessment to be released after the March 18-19 meeting. Possible options include changing the allocation of the three-tier system of current accounts held by commercial banks at the central banks, providing another 0.1% interest to banks for a certain period tied to lending criteria.

Boosting the basic balance -- a positive interest rate of 0.1% will be applied – will contribute to financial system stability.

The Macro-Add-on Balance, where a zero-rate is applied, has increased sharply since January 2016, paving the way for the BOJ to reduce it in favour of the basic balance.

The current balance was determined in January 2016 when the BOJ introduced the negative rate policy based on the average balance of the current account from January 2015 to December 2015.

YEN TOOL

Increasing the portion of the basic balance will make it easier for the BOJ to cut short-term rates from -0.1% if it sees a need to slow the yen's rise. Bank officials don't expect the yen to break far from the current Y103-105 trading range against the dollar but may need to act if it strengthens through Y100 and would like to make sure it has the tools in place.

BOJ Governor Haruhiko Kuroda hinted in late December that change could be coming, saying prolonged low interest rates "have a negative impact on financial institutions' profits."

"Such costs or side effects need to be minimized," he added.

"Anything that is unnecessary and inefficient should be avoided, but the focus of our assessment is not on lowering costs or mitigating side effects. Instead, the BOJ will adopt a forward-looking perspective of how to achieve stability in economic activity and prices by pursuing further effective monetary easing while mitigating side effects," Kuroda said.

MNI Tokyo Bureau | +81 90-2175-0040 | hiroshi.inoue@marketnews.com