BOJ's Shirai: Scrapping 0.1 pct rate floor may help weaken yen

TOKYO Wed Jan 16, 2013 1:39am EST

TOKYO (Reuters) - The Bank of Japan may help weaken the yen by scrapping a 0.1 percent floor it sets on short-term interest rates, its board member Sayuri Shirai said, suggesting that the idea should be discussed as a future policy option.

The BOJ, which guides its benchmark overnight call rate target at a range of zero to 0.1 percent, pays 0.1 percent interest on excess reserves that financial institutions park with the central bank. That effectively serves as a floor for money market rates and keeps them from falling to zero.

In a speech delivered at an economic forum in Rome, Shirai said scrapping the 0.1 percent floor may have the positive effect of pushing down short-term rates and weakening the yen.

But she warned that there was "a lack of clarity" on how the move would affect financial institutions' lending behavior.

While the step may serve as an incentive for financial institutions to boost lending, it may erode their profits since they will lose on interest payments for funds parked with the BOJ, Shirai said.

"Such pros and cons ... need to be better understood and properly discussed in light of the impact on overall economic and price movements," she said. The speech was delivered at the closed-door forum on January 12 and the text was made available on the BOJ's website on Wednesday.

The yen has fallen roughly 10 percent against the dollar since mid-November on expectations the BOJ will take bolder monetary easing steps to beat deflation.

Weakening the yen has been among the key objectives for Japanese policymakers as persistent yen rises have hurt big exporters already struggling with slumping global sales and competition with its South Korean rivals.

BOJ Governor Masaaki Shirakawa has been strongly opposed to scrapping the 0.1 percent floor on rates, arguing that doing so would discourage financial institutions from lending short-term funds to each other and distort proper market functioning.

But Koji Ishida, one of the BOJ's nine board members, proposed doing so at a policy meeting in December.

While the proposal was turned down by a 1-8 vote, Shirai's remarks show that the idea may emerge as a future policy option as the BOJ struggles to beat deflation with its depleted policy arsenal.

(Reporting by Leika Kihara; Editing by Simon Cameron-Moore)

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