BOJ's Funo stresses pre-emptive policy action, bolstering October easing chance

MATSUE, Japan (Reuters) - A Bank of Japan board member with a casting vote on policy decisions said the central bank must consider “preventive steps” against economic risks, a sign its nine-member board may be tilting toward further easing as global pressures intensify.

FILE PHOTO : A security guard walks past in front of the Bank of Japan headquarters in Tokyo, Japan January 23, 2019. REUTERS/Issei Kato/File Photo

In a speech on Thursday, Yukitoshi Funo - who has consistently voted with the majority of the nine-member board and holds a neutral stance - stressed the BOJ’s resolve to act without hesitation if economic hazards increase.

Market expectations of imminent easing grew after Governor Haruhiko Kuroda pledged in July to act preemptively.

Funo, a former executive of Toyota Motor 7203.T, highlighted the risks from overseas, such as U.S. economic policy and its impact on global markets, the Sino-U.S. trade war, Brexit, and geopolitical strife.

Kuroda could team up with Funo, along with three reflationist board members including deputy governor Masazumi Wakatabe, to swing the votes in the divided board in favor of easing as early as its next meeting on Oct. 30-31.

The BOJ needs to examine how various events would affect the output gap, and act preemptively before they materialize, Funo said.

“It would be too late (to act) when the outcome appears. In that sense foreseeing is a factor we should focus on,” Funo told a news conference after meeting with business leaders in Matsue, western Japan.

“We need to make a decision while taking preventive policy measures into account,” Funo told reporters.

At its latest policy review last month, the central bank stood pat but signaled the chance of expanding stimulus as early as its next policy meeting in October by issuing a stronger warning against overseas risks.

“We are facing a situation where we need to pay more attention than before to the risk that the momentum toward the price stability target will be undermined,” Funo said.

“With that situation in mind, we will reexamine economic and price trends at the next policy setting meeting,” he added.

Funo said various options can be considered to further ease policy, such as cutting short-term and long-term interest rates, boosting asset purchases and accelerating base money expansion, or a combination of these.

“In particular, protectionist moves are fuelling uncertainty,” Funo said. “As the global economy remains unstable, attention must be paid to these risks and their effects on Japanese business and households’ sentiment.”

Under a policy dubbed yield curve control (YCC), the BOJ pledges to guide short-term rates at -0.1% and the 10-year bond yield around 0%. It also buys risky assets to achieve its elusive 2% inflation target.

Sources say the BOJ will stick to its playbook of minor tweaks and verbal warnings to rein in sharp falls in long-term interest rates, raising questions about its ability to control the yield curve while managing market expectations.

The BOJ has said it has four tools to ease, namely lowering the long-term bond yield target, increasing asset purchases, accelerating base money printing and deepening negative rates. Governor Haruhiko Kuroda has made clear the central bank won’t rule out any of the options, including deepening negative rates, if it were to ease again.

However, with interest rates already near zero, many analysts say the central bank is in a bind given it has little ammunition to battle the next recession.

Reporting by Tetsushi Kajimoto; Editing by Chris Gallagher & Shri Navaratnam