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Report: Bank of Japan hints at possible earlier stimulus wind-down

Japan's central bank is beginning to hint at an earlier-than-expected exit from extraordinary monetary stimulus through an increase in its yield target, Reuters reported, citing people familiar with the institution's thinking.

While inflation well below the Bank of Japan's 2% target means it still sees no need to tighten conditions quickly, officials are increasingly concerned by the mounting costs of prolonged easing, such as shrinking bank margins, Reuters reported.

The central bank's governor, Haruhiko Kuroda, said Nov. 6 that he was "mindful" of the risk posed to banks' lending capacities by current monetary policy. Board member Yukitoshi Funo also referred to the cost of easing, Reuters reported.

The latest warning came from Kuroda in a speech Nov. 13, in which he mentioned a "reversal rate" — the level where rate cuts hurt instead of favor the economy.

"Because the impact of the low interest rate environment on financial institutions' soundness is cumulative, the BOJ will continue to pay attention to this risk," Kuroda said.

The newswire's sources stated that the first step would most likely be to let long-term rates rise, and Takahide Kiuchi, BOJ's former board member, reportedly added that it might be achieved by shifting the long-term rate target to five-year yields from 10-year yields by the first quarter of 2018.

Current monetary policy holds short-term rates at negative 0.1% and 10-year bond yields at around zero percent.

However, "the change in tone doesn't have immediate policy implications," one of the newswires' sources remarked. Another added: "It's important the BOJ prepares markets in advance with careful communication."