By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's top finance ministry bureaucrat said on Friday that domestic financial institutions were facing severe strain as long-term interest rates remained low due to the Bank of Japan's massive monetary stimulus.
Shigeaki Okamoto, administrative vice finance minister, also said in an interview with Reuters that financial markets are being driven by a range of factors and warrant close attention.
"Under the current monetary policy, it's true that long-term interest rates are at very low levels, which is causing financial institutions' earnings to face a severe situation," he said in an interview before a Reuters Newsmaker event.
"Financial markets are showing nervous moves, but looking at underlying economic indicators, both Japan and the United States stand on a firm footing."
Asked about a planned sales tax hike next year, Okamoto said he would do the utmost to prevent it from hurting consumer spending.
He steered clear of directly answering a question about further tax hikes, but he said the government needs to first implement social welfare reform over the next three years.
Okamoto, former director-general of the budget bureau, was promoted to the current post in an annual personnel reshuffle at the ministry in July.
He said Japan was no longer in deflation but it was hard to tell when the country can declare a victory in its battle against price declines.
Okamoto added that it was not impossible to meet the central bank's 2 percent inflation target if Japan makes progress towards a virtuous economic cycle to boost consumer spending.
Higher tax revenue will help Japan's primary budget balance improve and curb bond issuance, he said.
Speaking later at the Reuters Newsmaker event, Okamoto said further efforts are needed to meet the 2 percent inflation target, and yields will rise as policymakers take steps to vanquish deflation.
Yields on benchmark 10-year Japanese government bonds have fallen recently, in line with declines in global yields, which some analysts say is a signal that Japan's economic outlook could weaken.
Okamoto acknowledged the growing risks posed by trade friction but said Japan's economic fundamentals remain solid.
He reiterated that sudden currency moves are undesirable and that officials are monitoring financial market moves.
When asked about the BOJ's policy, Okamoto said the central bank still has several policy tools available and is likely to examine its options if it needs to make a move.
BOJ Governor Haruhiko Kuroda warned on Thursday of heightening risks to the economic outlook and signalled the central bank's readiness to ramp up stimulus if needed.
(Reporting by Tetsushi Kajimoto; additional reporting by Mayu Yoshida; Editing by Shri Navaratnam and Sam Holmes)
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