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BOJ's Suzuki signals chance of future rate hike, slower ETF buying

WAKAYAMA/TOKYO, Japan (Reuters) - Bank of Japan board member Hitoshi Suzuki said on Thursday the central bank could raise interest rates or slow the purchase of risky assets if the costs of prolonged monetary easing began to outweigh the benefits.

Bank of Japan (BOJ) new policy board member Hitoshi Suzuki attends a news conference at BOJ headquarters in Tokyo, Japan July 25, 2017. REUTERS/Issei Kato

The remarks from Suzuki, a former commercial banker who joined the board in July, underscored the BOJ’s dilemma as anemic price and wage growth forces it to delay normalizing policy, despite the rising cost of its radical stimulus program.

Suzuki said there was no need to withdraw or ramp up stimulus now. The economy was set to carry on growing but it still needed monetary support to accelerate inflation towards the central bank’s 2 percent target.

The BOJ, however, could raise its bond yield targets to minimize the effect of prolonged easing on financial institutions’ profits if subdued inflation forced it to sustain ultra-easy policy longer than expected, he said.

“The BOJ will patiently continue its powerful monetary easing now. On the other hand, the impact of such easing on bank profits accumulates,” Suzuki told a news conference after meeting business leaders in Wakayama, western Japan.

“If it becomes clear that more time would be needed (to achieve the BOJ’s price target), there’s a chance of modifying our policy framework to make it more sustainable and allow us to continue monetary easing for a longer period of time,” he said.

Suzuki also raised the possibility of the BOJ slowing its buying of risky assets such as exchange-traded funds (ETF), which has drawn criticism from some analysts for distorting stock prices.

“For now, the BOJ’s buying is a necessary step to achieve its target at the earliest date possible,” he said. “But the BOJ can’t keep buying forever, so future debate (on a possible slowdown) is necessary.”

Any such step would not lead to a full-blown withdrawal of stimulus because the BOJ would still keep monetary policy ultra-easy, Suzuki added.

After three years of heavy money-printing failed to fire up inflation, the BOJ revamped its policy framework in 2016 to one targeting interest rates, rather than the pace of asset buying.

The policy, dubbed yield curve control (YCC), which caps short-term rates at minus 0.1 percent and 10-year bond yields around zero percent, has drawn complaints from financial institutions for narrowing their already meager margins.

While Governor Haruhiko Kuroda has repeatedly rebuffed the chance of a near-term withdrawal of stimulus, some BOJ board members have openly warned of rising costs from the ultra-easy policy.

“We haven’t reached the point where we should talk about the timing of an exit or exit strategies,” Kuroda told lawmakers in parliament on Thursday. “We need to stick with our powerful quantitative easing.”

Workers in the services sector turned pessimistic about the outlook in January for the first time in six months, because extreme snow storms kept consumers at home, Cabinet Office data showed on Thursday.

The index measuring sentiment among taxi drivers, high street shop staff, and restaurant workers also fell by the most in more than three years, which supports Kuroda’s cautious tone.

Suzuki said the recent equity market sell-off, sparked by investor concern over the prospects of rising global interest rates, did not warrant additional monetary easing as it was unlikely to threaten Japan’s recovery prospects.

“The sell-off was caused by market sentiment shifting from one-sided optimism to pessimism, not by a change in economic fundamentals. It won’t have much impact on BOJ policy,” he said.

Reporting by Leika Kihara; Editing by Richard Borsuk and Eric Meijer