UPDATE: MNI POLICY: BOJ Sakurai: Warns Of Policy Side-Effects

--Adds Comments From Briefing in Paragraphs 4-8

     AKITA, Japan (MNI) - It is appropriate for the Bank of Japan to maintain

its current powerful easy policy while paying attention to developments of both

the stability of the financial system and economic conditions, board member

Makoto Sakurai said Thursday.

     "It's important for the BOJ to examine the side-effects of easy policy and

to keep the sustainability of the easy policy," Sakurai said in a speech to

business leaders in Akita City, northern Japan.

     At the BOJ's previous policy meeting on Sep 18-19, the board decided in a

7-2 vote to maintain its current monetary easing stance under the yield curve

control framework, vowing to keep very low interest rates "for an extended

period of time."

     Sakurai told reporters that it will take time to achieve the BOJ's 2% price

target as structural problems are restricting price rises. But he sees no need

to change the 2% price target and no need to take additional easy policy

measures now.

     "It is important for the BOJ to maintain the current easy policy and it

isn't necessary to take additional easy policy amid increasing uncertainty over

price moves," Sakurai said.

     "It is difficult to predict the timing of achieving the 2% price target" as

price moves aren't determined by the output gap alone.

     When asked about the drop in the Nikkei stock index, which closed at

22,590.86 Thursday, down 915.18 points, or 3.89%, Sakurai said that the BOJ must

watch how the drop in the Nikkei stock index affects consumer and business

sentiment.

     Other key points from Sakurai's speech:

     --Sakurai, an advocate of the idea that the BOJ must keep a close eye on

the side-effects of easy policy, warned, "Maintaining the easy policy to achieve

the price stability target will cause a risk the financial and economic

imbalances accumulate."

     --Low interest rates will lower banks' profits and undermine banks' capital

bases, which in turn will accelerate banks' risk-taking activities. If banks'

assets worsened, it would impair banks' ability to maintain businesses, which

will

worsen functioning in the financial system.

     --The BOJ must examine financial imbalances and manage monetary policy in

an appropriate manner, he said, without elaborating how the BOJ addresses the

risks its facing now.

     --It isn't appropriate to widen the economy's output gap too much to boost

prices, as such a move would increase economic imbalance and undermine the

stability of the financial system.

     --With uncertainty over price moves increasing, the BOJ should take time to

maintain the easy policy under the forward guidance policy framework, while

paying careful attention to the accumulated side-effects of easy policy.

--Sakurai also voiced concern over increasing uncertainties regarding the

outlook for the global economy and over downside risks from trade disputes and

fund outflows from emerging economies.

     --Sakurai gave an optimistic outlook for Japan's economy, but warned of the

risk that Japan's economy may deviate from the baseline scenario, depending on

the degree of shock caused from protectionism and emerging economy fund

outflows.

     --On inflation rates, Sakurai said Japan's price moves are weaker than

initially expected on the back of downward price pressure stemming from a

deep-rooted deflationary mindset and corporate productivity improvements to

absorb higher costs.

--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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