MNI INTERVIEW: BOJ Should Rethink Its Infla Target: Ex-Offcl

--Ex-BOJ Yamamoto: BOJ Low Rate Policy Has Large Harmful Effects 

--Ex-BOJ Yamamoto: Regional Banks' MarginS May Fall To 0 Percent

--Ex-BOJ Official: BOJ Should Leave 10-Yr Rate To Markets

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan should consider how it approaches the task

of getting inflation higher although it is very unlikely that the central bank

will abandon the current easy policy unless it drops the framework of hitting a

sustainable 2% price target, a former senior Bank of Japan official told MNI.

     "The BOJ should conduct a comprehensive assessment of prices," said Kenzo

Yamamoto, a former executive director in charge of financial stability at the

BOJ.

     "Policymakers should pay attention to the financial system and real estate

prices in addition to prices and it is wrong that the central bank can do

anything in order to achieve a specific price target," Yamamoto said.

     But such a decision is unlikely under the current political environment, as

any change in the policy framework will likely push the yen higher and run into

criticism by the government.

     --BANK PROFITS

     Yamamoto also warned that the BOJ's current policy of controlling the will

push lending margins for Japan's regional banks to zero, forcing them into a

further round of cost-cutting as profits fall.

     Although sympathetic to the banks' problems, he said as private companies

they needed to make utmost efforts to tap sources of profit.

     Along with low markets rates as the BOJ continues to buy JGBs, holding

benchmark 10-year yields close to zero, lenders also have to compete with the

very low lending rates offered by government financial entities to companies in

regional cities.

     For example, the Welfare and Medical Service Agency, formed to take over

the duties of the Social Welfare and Medical Service Corporation, is offering

floating-rate 30-year loans to hospitals, nursing care and child care facilities

at rates of just 0.2% to 0.3% in the first 10 years, Yamamoto told MNI.

     --JGB YIELDS

     "Extreme low lending rates by governmental financial firms are caused by

low 10-year bond yields," Yamamoto said, saying the BOJ needed to understand the

harmful impact from their efforts to keep JGB yields under control and consider

all the side-effects. Perhaps it would be better for the BOJ to leave the

pricing of 10-year yields to the market, he added.

     According to Yamamoto, 10-year JGB yields at these levels would normally

reflect a situation implying "a Lehman-shock level financial crisis" and it

makes it difficult for private banks to conduct business management under these

circumstances.

     He downplayed the imminent risk that the severe profit conditions at

regional banks could swiftly causes a systemic risk, perhaps triggering the need

of injecting public funds into those banks.

     "Bank's margins are falling gradually and a worsening of profits is

moderate. Unless non-performing loans emerge and rise sharply, the conditions

will not occur where the government pumps public funds into regional banks,"

Yamamoto said.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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