February 25, 2016 / 2:18 AM / 2 years ago

BOJ Kiuchi warns of negative rate costs, limits to easing

KAGOSHIMA, Japan (Reuters) - Bank of Japan board member Takahide Kiuchi said the central bank may have exhausted steps to spur inflation and warned that the adoption of negative rates could bring more risks than rewards, highlighting a growing rift within the BOJ’s board over the conduct of monetary policy.

Newly-appointed Bank of Japan (BOJ) board members Takehiro Sato (L) and Takahide Kiuchi attend their joint news conference at the BOJ headquarters in Tokyo July 24, 2012. REUTERS/Issei Kato

His remarks contrast with BOJ Governor Haruhiko Kuroda’s assurances that there are no limits to what the central bank can do to hit its 2 percent inflation goal.

Kiuchi, among four of the nine board members who voted against last month’s surprise decision to introduce negative rates, blamed the move for heightening market volatility and warned the benefits may be small as borrowing costs are already very low.

“The demerits of negative rates is that it could potentially reduce financial system stability by causing further harm to financial institutions’ revenues,” Kiuchi said in a speech to business leaders in Kagoshima, southern Japan, on Thursday.

Adopting negative rates could backfire and work to tighten monetary conditions if banks decide to pass on the costs by charging borrowers higher rates or transaction fees, he added.

A former market economist, Kiuchi has been a lone proponent to taper the bank’s massive asset-buying program. He has long argued that its aggressive bond buying was distorting market functions and making a future exit from the program difficult.

Kiuchi said the BOJ should not try to weaken the yen further or take extreme steps to hit its price target, stressing that government and private-sector efforts to boost Japan’s growth potential were also necessary to accelerate inflation.

The central bank instead should focus on ensuring Japan has a sufficient backstop for when a global market shock threatens to destabilize its banking system.

“It’s becoming very difficult to come up with additional, very effective steps to achieve our price target,” Kiuchi told reporters after the meeting with business leaders.

But the BOJ has room to strengthen an existing dollar swap arrangement with other central banks to ensure Japanese banks don’t suffer from a shortage of dollar funds in times of crisis, he added.

The BOJ adopted negative rates last month to supplement its large-scale quantitative and qualitative easing program to prevent volatile markets from delaying an end to deflation.

The move has pushed bond yields into negative territory, but has drawn criticism from some lawmakers for failing to boost stock prices or arrest an unwelcome rise in the yen.

Reporting by Leika Kihara; Editing by Chang-Ran Kim & Shri Navaratnam

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