MNI: UPDATE2: BOJ Suzuki: Must Watch Costs of Prolonged Easing

--Adds Comments From Briefing in Paragraphs 3-12

     WAKAYAMA, Japan (MNI) - Bank of Japan board member Hitoshi Suzuki said

Thursday that the BOJ must carefully watch the adverse effects of continued

large-scale monetary stimulus on the economy and financial markets.

     "We need to continue closely watching the effects that the recent

large-scale monetary easing is having on the economy, prices and financial

conditions," Suzuki said in a speech to business leaders in Wakayama City,

western Japan.

     Later, Suzuki told a news conference that a slight adjustment of the

current large-scale monetary easing program is "possible," depending on the

developments of the economy, prices and financial conditions.

     "Even if we were to fine-tune the easing, it would not show a big change in

the powerful easy policy," he said.

     "When it is expected that economic activity and prices will continue

improving, the BOJ will need to consider an adjustment of the levels of interest

rates under the framework of QQE (Quantitative and Qualitative Monetary Easing),

also from the perspective of reinforcing the sustainability of the monetary

policy."

     "The BOJ needs to persistently continue its powerful easing but we also

need to pay attention to the cumulative impact of prolonged easing on the

economy, prices and financial conditions," Suzuki said.

     In response to questions, he said he didn't think additional easing would

be necessary at this point.

     On the stock market sell-off, he said, "The recent volatile market moves

... will not affect the BOJ policy as domestic and overseas economic

fundamentals remain solid."

     "The momentum toward achieving the 2% price stability target is maintained

and we need to carefully watch developments in wage hikes and prices," Suzuki

said.

     Asked about the recent BOJ market operations that some investors

interpreted as stealth tapering, he said, "There was misunderstanding among some

foreign market participants."

     On Jan. 9, the BOJ reduced the scale of its purchase of longer-term

Japanese government bonds.

     "The BOJ's daily market operations don't indicate the future course of

monetary policy," Suzuki said.

     In his speech, Suzuki said that while interest rates have been maintained

at super-low levels under the BOJ's yield curve control policy framework adopted

in September 2016, "markets are living creatures" that can hurt the real economy

as seen in the past financial crises.

     The outstanding bank lending balance has been rising amid low borrowing

costs but stiff competition among lenders and low returns on portfolio

investments have squeezed profits in the financial industry, Suzuki noted.

     "I'm particularly focused on the impact on returns on securities held by

financial institutions and lending rates; corporate bond interest rates and fund

flows between companies and investors; and fund management for insurance and

pension plans," he said.

     "At this point, the stability in the financial system is believed to be

maintained, but we need to carefully monitor the cumulative impact of the

sustained large-scale monetary easing on the financial system and the

intermediation of financial firms."

     But Suzuki didn't say the BOJ needed to consider scaling back the

aggressive easing program launched in April 2013 that has helped push up

inflation only slowly.

     Repeating the official line that the BOJ is still halfway toward achieving

its 2% inflation target, he said, "It is important to continue powerful monetary

easing persistently."

     Suzuki was an executive at the Bank of Tokyo-Mitsubishi UFJ before joining

the BOJ's nine-member board in July 2017.

     At its latest policy meeting on Jan. 22-23, the BOJ board decided in an

8-to-1 vote to maintain its current monetary easing stance under the yield curve

control framework.

     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%.

     Despite the slow pickup in inflation, Suzuki repeated the bank's baseline

scenario presented at the latest policy meeting that the BOJ can achieve the 2%

price target "around fiscal 2019."

     The national average core consumer price index (excluding fresh food) was

flat on the month in December, leaving the year-on-year increase at 0.9%,

unchanged from November.

     The core-core CPI (excluding fresh food and energy) rose just 0.3% on year

in December after rising 0.3% in November.

     On the near-term price outlook, Suzuki said, "Upward pressure on prices has

been increasingly steadily," judging from the improvement of the output gap.

     The latest BOJ data showed that the output gap of the economy -- one of the

key factors that affect inflation -- was 1.35 percentage points in the

July-September quarter, the fourth straight positive figure following +1.18%

points in the April-June quarter.

     "Inflation expectations are likely to rise," Suzuki said, predicting that

companies are expected to gradually shift toward raising wages and prices.

     However, he also said it takes time for more firms to raise prices.

     Suzuki also said that upward pressure on import prices will increase due to

the effect of the yen's fall since 2016, although the impact of the past rise in

crude oil prices will fade gradually.

--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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