BOJ policymaker warns of dangers of more monetary easing

BANK OF JAPAN / BOJ - KUMAMOTO. Bank of Japan board member Hitoshi Suzuki on Thursday warned of the potential dangers of ramping up monetary stimulus, saying further declines in borrowing costs could hurt consumers by prompting commercial banks to charge fees on deposits.

Suzuki, a former commercial banker turned BOJ policymaker, said the BOJ needed to pay more attention to the health of Japan's banking system in guiding monetary policy, given the rising strains on financial institutions from years of ultra-low interest rates.

"If the BOJ were to consider and implement specific monetary easing measures, it will take action deemed appropriate at the time while weighing the benefits and demerits of each step," Suzuki said in a speech to business leaders in Kumamoto, southern Japan.

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"Once the financial system destabilises, it will become very difficult to achieve price stability," he said.

The BOJ is in a bind. Years of aggressive money printing have crushed long-term interest rates and hurt financial institutions' profits by narrowing the margin it earns from borrowing cheap funds and lending at a higher rate.

It has also left the BOJ with little ammunition to fight the next recession, at a time other major central banks seek to expand stimulus to head off the effects of the bitter U.S.-China trade war.

Suzuki said if borrowing costs fell further, financial institutions could try to mitigate the pain by charging fees on bank deposits.

"If bank deposit rates effectively turn negative, it could hurt the economy by cooling consumer sentiment," he said.

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Under a policy dubbed yield curve control, the BOJ guides short-term interest rates at -0.1% and the 10-year government bond yield around 0% via heavy asset buying to achieve its elusive 2% inflation target.

The BOJ's nine-member board has been split between those like Suzuki, who are worried about the rising cost of prolonged easing, and reflationist-minded members who see more room to ramp up stimulus to accelerate inflation.