UPDATE: MNI 5 THINGS: BOJ Funo: Low Bank Risk, Watch Slow CPI

--Adds Comments From Briefing in Paragraphs 11-15

     SENDAI, Japan (MNI) - Bank of Japan board member Yukitoshi Funo said

Thursday that he sees a low risk that the bank's large-scale monetary easing

will hamper commercial banks' intermediation role in the economy, even though

zero interest rates are squeezing lender profits.

     Funo also told business leaders in Sendai City, northern Japan, that

consumer prices remain weak as firms are cautious about raising wages and prices

amid uncertainty. He called for a close watch on downside risks to prices and

inflation expectations.

     Later he told a news conference that the BOJ must watch for the negative

impact of the U.S. disputes with its key trading partners as protectionism would

shrink global trade and dampen growth.

     At its latest policy meeting on June 14-15, the BOJ board decided in an

8-to-1 vote to maintain its cautiously stimulative monetary easing stance under

the yield curve control framework.

     The key points from Funo's speech:

     -- There is a risk that if downward pressure on profits at financial

institutions under low interest rates continued, banks' intermediation function

would stagnate or the financial system would destabilize. But such a risk is not

high at this point because banks have sufficient capital bases.

     -- Overheated activities among financial institutions or excessively

bullish expectations in the asset markets have not been observed.

     -- It takes some time before companies raise wages and prices at a faster

pace. If weak prices continued, a rise in inflation expectations among

households and firms would be delayed. The BOJ must carefully watch for the

risk.

     -- The momentum toward achieving the 2% inflation target is maintained but

Japan is still far from the inflation target, and thus the BOJ must persistently

maintain the current easy policy.

     -- The BOJ needs to pay attention to various risks including the U.S.

economic policies and its impact on global financial markets, geopolitical risks

and the uncertainty over trade policies.

     The key points from Funo's news conference:

     -- "I expect consumer prices to rise with fluctuations," Funo said, adding

the recent slower pace of year-on-year increase in the core CPI (excluding fresh

food) at +0.7% in April, down from +0.9% in March and +1.0% in February, was not

surprising.

     -- The former Toyota Motor executive believes the recent slowdown in

inflation is "temporary" and that prices should "rebound," although he is aware

of the structuration weakness of service prices in Japan, due partly to

regulated low wages for caregivers and daycare workers as well as depressed

imputed rents.

     -- But at the same time, Funo also said the BOJ board will keep a close

watch on a vicious circle of slow price rises lowering inflation expectations,

which are limiting wage and retail price hikes. "Looking ahead, we will monitor

prices without bias. We will continue discussing our policy at every meeting and

will consider whether it is necessary to make any policy adjustments," he said.

     -- Funo said that BOJ must watch the drag from the protectionist U.S.

policies, which could reduce trade volumes and slow global growth.

--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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