BOJ policymaker calls for keeping ultra-easy policy, with eye on risks

By Leika Kihara

FUKUOKA, Japan (Reuters) - Bank of Japan board member Takako Masai on Thursday stressed the importance of maintaining a massive stimulus programme to ensure the economy generates enough momentum to achieve the central bank's 2 percent inflation target.

She said the BOJ, however, must carefully weigh the costs and benefits of prolonged easing, suggesting the central bank remains open to making further tweaks to its policy framework if necessary.

"Monetary easing can stimulate the economy. On the other hand, prolonged low rates could have adverse effects on bond market functions and financial institutions' profits," Masai said in a speech to business leaders in Fukuoka, southern Japan.

"In guiding monetary policy, the BOJ must thoroughly scrutinise the costs and benefits of its policy from various perspectives," she said.

Masai said price growth remained weak despite Japan's solid economic expansion due to the public's sticky deflationary mindset and corporate efforts to streamline operations.

But she offered an optimistic view on price prospects, saying the economy has not lost momentum to nudge inflation towards the BOJ's 2 percent target.

"As such, the best approach would be to sustain the current ultra-loose monetary policy ... so the positive momentum is not disrupted," she said.

Under a policy dubbed yield curve control, the BOJ guides short-term interest rates at minus 0.1 percent and long-term rates around zero percent to achieve its 2 percent price goal.

Subdued inflation has forced the central bank to maintain its huge stimulus programme despite the rising costs, such as the hit to financial institutions' profits from years of near-zero rates.

With its inflation target proving elusive, the BOJ took steps in July to make its policy framework more sustainable such as allowing bond yields to move more flexibly around its target.

"Such flexible measures the BOJ took (in July) will help sustain sound market functions," Masai said.

The BOJ's nine-member board is split between those who see room to ramp up stimulus, and those who are becoming increasingly worried about the dangers of prolonged easing.

Some BOJ policymakers have publicly voiced concern over the such risks, with one signaling the chance of further tweaking its policy framework.

A former commercial bank executive, Masai has voted with the majority since joining the board in 2016.

(Reporting by Leika Kihara; Editing by Chris Gallagher & Shri Navaratnam)