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The Bank of Japan will consider a new lending facility to support banks if prolonged low interest rates start to impact financial intermediation, according to a former board member.

The BOJ's statement that it will act swiftly to ease further if necessary and "without hesitation" means that the bank would if needed consider a temporary emergency new facility as, Makoto Sakurai, who stepped down from the BOJ board on March 31, told MNI on Wednesday.

The Bank is now more aware of the side-effects of easy policy, said Sakurai, who did not elaborate as to what any new facility could look like.

With the first repayment of emergency Covid-19 loans by smaller companies coming due from May, commercial banks may have to increase loan-loss reserves, which in turn could undermine the smooth functioning of financial intermediation, Sakurai warned.

WARNINGS

The BOJ has of warned of potential shocks to the financial system since September 2016 when it first introduced yield curve control, Sakurai said, although he admitted that back then policymakers did not understand the side-effects of easy policy as well as they do now.

The BOJ board is now paying greater attention to wider financial system stability issues, he said.