REPEAT: BOJ Masai: Must Watch Costs, Benefits of Easing

Repeats Story Initially Transmitted at 06:42 GMT Dec 6/01:42 EST Dec 6

--Adds Comments From Briefing Throughout

     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 to

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

2%.

     Later, she told a news conference that no excessive asset price swings have

been observed under the current easing program.

     "Generally speaking, if easy policy is prolonged, side-effects would be

seen in a worsening of market functioning, a rise in asset prices and a

worsening of the banking system's intermediation function," she said.

     But so far, Masai said, liquidity and trading volumes in the Japanese

government bond market have not shown any further deterioration. The BOJ's

massive purchase of JGBs in recent years has already lowered the bond market

function.

     "The risk of banks' intermediation worsening is low because banks have

sufficient capital bases," she said.

     She repeated the BOJ's official line that large-scale purchases of

exchange-traded funds is part of the easy policy aimed at lowering risk

premiums, which is a necessary for achieving the inflation target.

     In her speech, Masai said, "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."

     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,"

     In her speech, Masai didn't say what side-effects the BOJ needs to monitor

but other board members have said keeping interest rates too low is squeezing

profit margins for lenders, which could hurt their financial intermediation

function.

     At their last policy meeting on Oct. 30-31, many BOJ board members saw no

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

side-effects of additional accommodation would exceed the benefits, 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%.

     Masai said the Japanese economy is expected to continue expanding

moderately based on balanced domestic and overseas demand but she also warned

about the slow pace of increase in consumer prices.

     "I think downside risks to economic activity are limited. But downside

risks to prices are considerably high," she said, basically repeating the

board's analysis presented in its quarterly Outlook Report issued on Oct. 31.

     "This is because of the high uncertainty over how corporate stances on

raising wages and prices will spread in the future."

     Later, Masai told reporters that if downside risk to prices increased, the

BOJ would examine the reason and consider how to respond.

     In the face of labor shortages, transport firms and restaurant chains are

raising wages and prices but some firms are refraining from raising retail

prices and wages as they are absorbing higher costs through an increase in labor

productivity.

     Masai in the speech noted that the globalization and digital innovation are

pushing down prices in industrialized economies.

     Japan's national average core CPI (excluding fresh food but including

energy prices) rose 0.8% on year in October, the 10th straight year-on-year

rise, after +0.7% in September.

     Excluding the upward pressure from energy prices, the underlying price

trend has shown a slow improvement. The CPI excluding fresh food and energy (the

core-core CPI) rose 0.2% on year in October, after rising 0.2% in September.

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

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