September 13, 2018 / 8:52 AM / 2 months ago

Japan bank lobby gives lukewarm welcome to BOJ's July move

TOKYO (Reuters) - The head of Japan’s banking industry lobby on Thursday gave a lukewarm welcome to the central bank’s decision in July to allow bond yields to move more flexibly, calling for further scrutiny on the rising cost of prolonged monetary easing.

FILE PHOTO: A Japanese flag flutters atop the Bank of Japan building in Tokyo, Japan, September 21, 2016. REUTERS/Toru Hanai/File Photo

Koji Fujiwara, chairman of the Japanese Bankers Association, said the Bank of Japan’s July move to make its policy framework more sustainable took into account concerns held by his industry that years of near-zero rates were straining the banking system.

But bond yields remain very low, he said, noting that the central bank introduced new guidance in July pledging to keep rates low for an extended period.

“We’ve been saying it’s important to prevent the demerits from monetary policy from accumulating ... Our concerns have been taken into account to some extent,” Fujiwara told a news conference.

“If powerful monetary easing were to continue for a prolonged period, more scrutiny would be needed on whether this could hurt consumers’ sentiment and weigh on growth,” he said.

With inflation distant from its 2 percent target, the BOJ has been forced to maintain its massive stimulus program despite the rising costs of near-zero rates, such as the hit to bank profits.

The central bank has faced criticism from the banking industry about the diminishing returns of its policy. Even some within the BOJ board have publicly warned of the need to pay more attention to the rising cost of prolonged easing.

Mindful of such concerns, the BOJ took steps in July to make its policy framework more sustainable, such as allowing bond yields to move more flexibly.

But long-term interest rates have barely risen, as the BOJ’s pledge to keep borrowing costs very low for long has discouraged market players from betting on future rate hikes.

Takashige Shibato, head of Japan’s regional bank lobby, also welcomed the BOJ’s July decision but warned that the measures did not address the fundamental problems of its policy.

“We’re strongly concerned about the profit outlook for regional banks, if current monetary easing were to continue,” he told reporters on Wednesday.

Fujiwara said Japan should pay heed to recent comments by U.S. Federal Reserve Chairman Jerome Powell that inflation may not be the best measurement in guiding monetary policy, suggesting the BOJ should not persist in meeting its price goal.

The stagnant bond market moves will likely be among topics the BOJ’s board will debate when it meets for a rate review next week.

Additional reporting by Taiga Uranaka; Editing by Shri Navaratnam and Darren Schuettler

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