REPEAT: MNI INTERVIEW: Ex-BOJ Offl: Rethink On 2% Target Vital

Repeats Story Initially Transmitted at 04:20 GMT Nov 15/23:20 EST Nov 14

--Ex-BOJ Momma: Low Lending Rates Vs. Risks Crucial Situation

--Ex-BOJ Momma: Raising Rates Will Not Mitigate Side-Effects

--Ex-BOJ Offl: BOJ More Focused On Near-Term View Than Future Risks

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan must rethink how to achieve its 2% price

stability target, as they cannot address the accumulated side-effects of easy

policy under the current policy framework, a former BOJ chief economist told MNI

in an interview this week.

     "It is very vital for the BOJ to change its knowledge of the 2% price

target as the BOJ cannot weaken the degree of the easy policy as long as the BOJ

is aimed at achieving the 2% price target," Kazuo Momma, now executive economist

at Mizuho Research Institute, told MNI Tuesday.

     Momma said that the BOJ needs to compare the merits of achieving the 2%

price target at the possible earliest time alongside the costs of the

accumulated risks.

     He noted that the BOJ board is concerned over the side-effects of easy

policy but it will not make any policy adjustments as it judges there is no sign

so far of excessively bullish expectations in asset markets or in the activities

of financial institutions.

     "The board judges the near-term situation is more important than future

risks," Momma said, adding that the BOJ should seriously consider which is more

important -- satisfaction with the near-term situation or the preemptively

minimizing medium- to long-term risks and costs of a prolonged easy policy.

     "There was no board discussion that the BOJ should preemptively adjust the

easy policy in case of future risks. Looking ahead, the important issue is

whether the board discusses the necessity to cope with growing future risks,"

Momma said.

     --TRANSMISSION PROBLEMS

     Momma also addressed policy transmission issues and the impact on the

health of banks, warning over the findings of BOJ surveys that show around half

of regional financial institutions responded that loan interest rates for

middle-risk firms do not adequately match credit costs.

     "The survey results, not a BOJ analysis, have very grave consequences.

Regional financial institutions themselves recognize the grave conditions. The

survey results are very crucial and Japan's authorities should swiftly prompt

those banks to increase capital bases," he said.

     Momma said that raising interest rates alone will not ease the side-effects

of easy policy and problems facing financial institutions.

     --2% TARGET PRIORITY

     He noted that the BOJ board members recognize the issues coming from

accumulated side-effects, but the BOJ board will not weaken their easy policy as

achieving the 2% price target remains top priority for the board.

     "If the risks materialized or unless the BOJ faces impending situation, the

board will not take the risks seriously," Momma said.

     As for wider economic issues, Momma said that Japan's economy is expected

to grow in the fourth quarter after a temporary contraction in the third.

     Japan's economy posted a first contraction in two quarters in the

July-September period, down 0.3% on quarter, or an annualized -1.2%, weighed by

private consumption, capital investment and exports following recent natural

disasters, preliminary gross domestic product data released Wednesday by the

Cabinet Office showed.

     "The economy will not fall into recession as it will continue to be

supported by domestic demand. Private consumption remains firm, although it

fluctuates. Corporate' appetite for capital investment is strong," Momma said.

     Momma, however, said that the BOJ sees the economy's fall in the third

quarter as "temporary", but added that the growth momentum is weakening as

economies in China and other Asian countries slow.

--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