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BOJ member warns prolonged easing may weaken economy, overstimulate demand

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BOJ member warns prolonged easing may weaken economy, overstimulate demand

Bank of Japan board member Makoto Sakurai warned May 24 that excessive monetary easing could undermine the economy and proposed that the bank pare down its massive stimulus program if the economy continues to strengthen, Reuters reported.

Sakurai added that the central bank must consider the risk that prolonged easing may lower financial institutions' profits and disrupt Japan's banking system, said the Reuters report.

"If financial institutions' profits are eroded for a long period time under a low-interest rate environment, that could affect financial intermediation," Sakurai said in a speech to business leaders in Maebashi, a city in eastern Japan.

The BOJ's yield curve control, which caps long-term borrowing costs at zero, will have a stronger effect in boosting demand as inflation expectations and Japan's economic potential grow, Sakurai said. He added that maintaining an ultra-easy policy for too long could create excessive demand.

"We need to pay utmost caution so that changes in the external environment don't disrupt the balance between supply and demand," he said "The BOJ must examine how best to guide monetary policy as needed without any preset idea, taking this point into account."

Under the YCC, the BOJ guides short-term rates at minus 0.1% and the 10-year bond yield around zero percent. BOJ Governor Haruhiko Kuroda has said the central bank was not in a hurry to reduce its stimulus with inflation still well below the 2% target, Reuters reported.

Japan's core consumer price growth, excluding fresh food prices, slowed to an annual 0.7% in April before seasonal adjustment, down from 0.9% in March.

But Kuroda has also signaled the possibility of raising the yield target before inflation hits 2%, Reuters said.

A summary of opinions at the BOJ's April meeting released on May 10 showed the bank is laying the groundwork for a future withdrawal of its stimulus program as some policymakers flagged the increasing cost of prolonged easing.

In late April, the bank's policy board voted 8-1 to keep its monetary policy steady, but removed wording on hitting the 2% inflation target around fiscal 2019.