UPDATE2: MNI POLICY: BOJ Kuroda: To Keep Low Rates for 2% CPI

--Adds Comments From Briefing in Paragraphs 5-9, 12-13

     OSAKA, Japan (MNI) - Bank of Japan Governor Haruhiko Kuroda on Tuesday

vowed to maintain low interest rates for a long time to guide inflation to the

bank's 2% price stability target, but noted the central bank's commitment to

keeping very accommodative financial conditions is not based on a specific

period.

     He also told business leaders in Osaka, western Japan, that the BOJ's

latest policy intention decided in July is accurately understood by market

participants.

     "It is very important to make clear that the BOJ will maintain the current

extremely low levels of short- and long-term interest rates for an extended

period of time," Kuroda said in a speech.

     But he also said the forward guidance "is not based on a specific period of

time."

     --WIDER JGB RANGE

     Later at a news conference, Kuroda said he hoped to see the 10-year

Japanese government bond yield to move in a wider range.

     "Fluctuations in the 10-year bond yield have been limited to a tight range,

which means the functioning of the bond markets is declining. We wouldn't mind

seeing a wider movement of the 10-year yield," he said.

     "It is appropriate for the 10-year bond yield to move widely. In order to

keep the sustainability of monetary policy, the BOJ will continue carefully

watching the side-effects of easy policy and will respond appropriately," he

said without elaborating.

     Kuroda also said that interest rate gap between Japan and U.S. is unlikely

to narrow, and may widen, as the BOJ is committed to keeping the 10-year bond

yield "around zero percent."

     The U.S. Federal Reserve Open Market Committee is expected to raise the

federal funds rate from a range of 1.75% to 2.00% at its two-day policy meeting

ending Wednesday, although the Fed is likely to suspend its rate hikes sometime

in next year.

     At its July meeting, the BOJ 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 Japanese government bond yield to steepen slightly in line with

firmer growth and inflation.

     The BOJ adopted "forward guidance" for the policy rates to show that it is

"strengthening its commitment" to guiding low inflation to its stable 2% target.

This should help the bank "persistently continue" aggressive monetary easing as

the stubborn deflationary mindset lingers among businesses and households.

     Kuroda told reporters that achieving the 2% price stability target is the

most important task for the BOJ, and thus the bank is unlikely to modify its

easy policy before hitting the target.

     At the same time, he said, "I wouldn't rule out the possibility that the we

may change the part about 'an extended period of time' in the forward guidance

in the future."

     In his speech, Kuroda said since it takes time to achieve the 2% price

target, the BOJ needs to maintain the easy policy. But he added that in

continuing with aggressive monetary easing, "we now need to consider both its

positive effects and side effects in a balanced manner."

     --EXTERNAL DOWNSIDE RISKS

     "Overseas economies have continued to grow firmly on the while," Kuroda

said, repeating the bank's latest assessment.

     "Japan's economy is likely to continue its moderate expansion. However,

there are various risks to this baseline scenario, and uncertainties regarding

overseas economies in particular warrant attention."

     "It is necessary to thoroughly examine the extent to which recent

protectionist moves, such as the trade friction between the United States and

China, will affect trade as well as firms' investment activities."

     In Japan, prices have continued to show relatively weak developments

compared to the economic expansion and the labor market tightening, Kuroda noted

but said the mechanism for a rise in inflation itself isn't lost.

     He also repeated his earlier remarks that foreign exchange rates must

reflect economic fundamentals and move in a stable manner. The BOJ will continue

watching the forex impact on the economy, he said.

     --WATCHING SIDE-EFFECTS

     Kuroda also said that the BOJ continues paying attention to the accumulated

effects of prolonged easing on the financial system and banks' profits as the

BOJ needs to keep the easy policy for an extended period to achieve the 2% price

target.

     "We will conduct monetary policy by taking account of developments of

financial conditions," he said without elaborating.

--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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