UPDATE: MNI POLICY: BOJ Amamiya: Must Eye Growing Side-effects

--Adds Comments From Press Briefing at bottom

     SHIMONOSEKI, Japan (MNI) - Bank of Japan Deputy Governor Masayoshi Amamiya

warned Thursday that the central bank must pay greater attention to accumulated

side-effects of easy policy than previously.

     "In order to persistently continue tight the current powerful monetary

easing, it is necessary to contain the accompanying negative effects, or the

side effects," Amamiya said. 

     Amamiya didn't outline an immediate need to change policy, saying, "The BOJ

will pursue powerful monetary easing while thoroughly examining both the

benefits and costs of its policy effects."

     "The BOJ will make policy adjustments as appropriate, taking account of

developments in economic activity and prices as well as financial conditions,

with a view to maintaining the momentum toward achieving the price stability

target," he added. 

     --AMAMIYA'S KEY POINTS:

     --"The economy is no longer in deflation, in the sense of a sustained

declines in prices." However, prices remain weak, compared with the economic

recovery and the labor market tightening.

     --"Even amid the economic expansion, there is a combination of various

factors that makes it difficult for wages and prices to rise. It has been taking

time to resolve these factors..."

     --"What is important is not temporary price fluctuations but the underlying

trend in prices." "Having said that, there is a possibility that people's

inflation expectations will move upward and downward in line with price

fluctuations, thereby affecting the underlying trend in prices."

     --"Giving due consideration to these points, the BOJ will assess future

price developments and communicate developments in such special factors to the

public in an appropriate manner."

     --Financial markets remain volatile on the back of high uncertainties over

the global economy. "Financial markets both at home and abroad have remained

volatile."

     --"The BOJ will continue to carefully monitor developments in the domestic

and overseas markets, including the effects on firms' and households'

sentiment."

     --"The BOJ is fully aware that prolonged downward pressure on financial

institutions' profits, with the low interest rate environment and severe

competition among financial institutions continue, could create a risk of a

gradual pullback in financial intermediation and of destabilizing the financial

system.

     --TOOLS AVAILABLE

     When questioned, Amamiya told a press briefing that there are four tools

available to the BOJ, including lowering short- and long-term interest rates,

expanding asset purchases and accelerating the pace of increasing the monetary

base, although he didn't elaborate.

     He underlined that the BOJ still needed to conduct easy policy to maintain

momentum toward hitting the 2% price target. Amamiya noted a drop in prices to

be caused by special factors will not affect BOJ policy, but they must closely

monitor any impact of inflation expectations.

     When asked about the U.S. Federal Reserve's policy decision, leaving rates

unchanged, Amamiya said the move was aimed at supporting the U.S. economy, which

would help strengthen the dollar, which "in turn will be a good factor for

Japan's economy."

     He dismissed the suggestions that a narrowing interest rate gap between the

U.S. and Japan due to the Fed's decision will increase upward pressure on the

yen, saying, forex rates were decided by may factors, not just rate

differentials.

     The Fed held rates steady Wednesday, signalling a move into a neutral

stance on further rate adjustments, citing muted inflation and ebbing global

growth as reasons to stay patient for the time being. The FOMC also abandoned

statement language pointing to "further gradual increases" in rates would be

consistent with economic objectives.

     --OUTPUT GAP

     Amamiya said that the BOJ needs to keep the output gap positive for as long

as possible. Last week, the BOJ's Outlook Report said the output gap "is

expected to remain substantially positive", which Amamiya indicated he sees as

around 1% or slightly higher.

--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

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