REPEAT: MNI POLICY: BOJ Suzuki Warns of Runaway Easing Costs

     NAHA, Japan (MNI) - Bank of Japan board member Hitoshi Suzuki on Wednesday

warned that growing side-effects of prolonged large-scale monetary easing would

become too big to control if the central bank didn't keep a close watch on both

the costs and benefits of its policy.

     At the same time, he also said the BOJ board's decision in July to allow a

wider trading range for the benchmark long-term interest rate was not aimed at

pushing up the levels of borrowing costs.

     The BOJ's policy stance to keep zero to negative interest rates aimed at

guiding low inflation to its 2% target has squeezed profit margins for lenders

and slashed investment returns for pension fund managers.

     In a speech to business leaders in Naha, southwestern Japan, Suzuki said,

"As for the conduct of monetary policy, we have to keep a close eye on medium-

to long-term effects and side-effects."

     "We must pay a full attention to the risk that it would be difficult to

cope with the situation well or too late to act if the accumulated side-effects

materialize sometime in the future."

     Later at a news conference, Suzuki had no comments on when the side-effects

were likely to have a visible impact on the economy and how the BOJ could

mitigate such a negative effect.

     "We must keep a close eye on how the side-effects will accumulate with the

passage of time," he said. "Banks have sufficient capital bases and fund

liquidity but the future risks are increasing."

     Suzuki, a former commercial banker who joined the nine-member policy board

in July 2017, has voiced concern over the costs of prolonged easing.

     --WATCH FINANCIAL SYSTEM

     "In addition to the impact (of easy policy) on government bond markets, we

need to pay attention to the impact of prolonged low interest rates on financial

institutions," he said.

     Suzuki also said the BOJ must watch how the business conditions of

financial institutions including regional lenders will affect the soundness of

the financial system and financial intermediation.

     --NOT RATE HIKE

     Suzuki also said that the BOJ's decision at its July 30-31 meeting to allow

the 10-year Japanese government bond yield to move in a wider range was not

aimed at raising interest rate levels.

     At the meeting, the board decided in a 7-to-2 vote to make its long-term

interest rate target and asset purchases more "flexible," allowing the nearly

flat JGB yield to steepen slightly in line with firmer growth and inflation.

     The statement didn't refer to the bank's new allowance for the same "around

zero" target for the long-term interest rate but Governor Haruhiko Kuroda told

reporters after the meeting that the BOJ was now allowing a wider trading range

of +0.2% to -0.2% for the 10-year JGB yield, double the previously unpublished

range of +0.1% to -0.1%.

     Suzuki told reporters that the decisions at the July meeting was not aimed

at boosting banks' profits or supporting banks' intermediation role in the

financial markets, but said it was aimed at recovering the functioning of the

bond market.

     --NO SPECIFIC TIMEFRAME

     In its statement issued after the July meeting, the BOJ said it aimed to

make monetary easing sustainable by conducting asset purchases "in a more

flexible manner" while promising to maintain super-low interest rates "for an

extended period" to counter uncertainties including the drag from the sales tax

hike planned in October 2019.

     "The expression 'for an extended period of time' in the forward guidance

does not specify any timeframes," Suzuki said.

     The forward guidance adopted in July gave the impression to market

participants that the BOJ would not raise interest rates before October 2019,

when the sales tax is scheduled to be raised to 10% from the current 8%.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com