* Kiuchi warns of big potential costs of QQE
* Repeats lone view BOJ should not set timeframe for price
* BOJ in future should shift to zero rates from asset
* Kiuchi's views on QQE, its costs, a minority within board
(Adds quotes from news conference)
By Leika Kihara
KOBE, Japan, July 31 Sluggish exports and
factory output could mean the Japanese economy's post-tax hike
rebound in the third quarter may be weaker than expected, a
central bank policymaker has said, warning of clouds hanging
over its stimulus programme.
Board member Takahide Kiuchi said the Bank of Japan's next
policy move ought to be an exit from, not an expansion of,
monetary stimulus, repeating his warning that keeping an
unconventional policy in place for too long could cause
distortions in the economy.
The BOJ should consider shifting the focus of monetary
policy to zero interest rates from asset purchases when moving
to end its ultra-loose stance, Kiuchi said, the first board
member to publicly discuss the best possible way to end its
quantitative and qualitative easing (QQE) programme.
"Under QQE, the BOJ purchases assets on an unprecedented
scale. Therefore, it is necessary to be particularly vigilant
against various potential risks," he said in a speech to
business leaders in Kobe, western Japan, on Thursday.
A former market economist, Kiuchi said there was no need to
alter the BOJ's forecast for the economy to continue recovering
moderately as robust domestic demand made up for weak exports.
But he warned the sharp build-up of inventory in June
suggests that companies may have overestimated demand and were
caught off-guard by the weakness in exports and household
spending after a sales tax hike in April.
"I don't see the need to change our view that economic
growth will pick up in the third quarter, but the pace will be
moderate," Kiuchi told a news conference after his meeting with
business executives in Kobe.
"Monthly economic indicators have also been relatively weak,
so while third-quarter economic growth is likely to be positive,
it may not be as strong as initially expected."
Kiuchi was the first board member to speak publicly after
Wednesday's data showing factory output in June suffered its
biggest fall since the devastating earthquake in March 2011,
calling into question the BOJ's argument that the economy will
ride out the April tax hike.
Exports also unexpectedly fell for two months, disappointing
policymakers who had hoped overseas shipments would rebound
before the tax hike hits consumer spending.
Kiuchi is among those on the BOJ board who tend to be more
pessimistic about the economic and price outlook, and he warned
that exports may not rebound any time soon due to structural
factors such as the increase in the number of Japanese firms
that have shifted production abroad.
"I don't think the economy will falter because domestic
demand continues to support the recovery even as exports fail to
pick up," Kiuchi said. "But if exports don't grow as much as
initially expected, we may have to cut our growth forecasts."
In its latest forecast issued in July, the BOJ expected the
economy to expand 1.0 percent in the business year ending March
2015. That was more upbeat than private sector analysts, some of
whom now warn Japan may barely grow in the current fiscal year.
The BOJ will next review its forecasts in October.
REVERTING TO RATE POLICY AN OPTION
Kiuchi repeated his view, which is not shared by others on
the board, that the BOJ should consider its 2 percent inflation
target as a long-term goal without a deadline, instead of
setting a two-year timeframe for achieving it.
Under the QQE programme put in place last April, the BOJ has
pledged to double base money through aggressive asset purchases
to achieve its 2 percent price growth target in two years.
While the BOJ now targets base money, not interest rates,
its asset purchases have pushed down bond yields across the
curve with 10-year borrowing costs now around 0.5 percent.
Kiuchi said that unconventional monetary policy, such as the
asset purchases under QQE, is effective as a temporary measure
to boost the economy but should not be used for too long because
its drawbacks are still unknown.
A conventional interest rate policy, on the other hand, is
useful as a fine-tuning tool to guide the economy and prices to
desirable levels after massive asset purchases lift sentiment,
"If developments in economic activity and prices continue to
steadily improve, I think it will be necessary in the future to
examine the option of gradually starting to shift the focus of
monetary policy conduct from asset purchases to zero interest
rates," he said.
Kiuchi has shared doubts, also held by many private-sector
analysts, that Japan will actually see 2 percent inflation in
two years after having been mired in deflation for nearly two
At the news conference, Kiuchi said the level of desirable
consumer inflation varied from country to country. For Japan, it
was near current levels around 1 percent.
"It may be feasible to aim for 2 percent inflation in the
medium- to long-term. But for now, that's too high."
(Editing by Chris Gallagher and Eric Meijer)