KOCHI, Japan (Reuters) - Higher long-term interest rates could help financial institutions by widening their margins, Bank of Japan board member Yukitoshi Funo said, signalling a rate hike could be a future option to ease pressure on banks’ profits from prolonged policy easing.
Funo, a former executive of Toyota Motor, said the central bank has no plan to dial back its ultra-loose policy in the near-term as global risks cloud prospects for hitting its elusive inflation goal.
But he warned that the BOJ must be mindful of the risks that prolonged stimulus could hurt financial institutions’ profits and destabilise the country’s banking system.
“Monetary policy is not the only factor affecting financial institutions’ profits,” Funo told a news conference after meeting business leaders in Kochi, western Japan, on Wednesday.
“But in general, a steeper yield curve would have a positive impact on financial institutions because it would widen margins for them,” he said.
The remarks contrast with those of BOJ Governor Haruhiko Kuroda, who said on Monday that higher yields would hurt financial institutions by cooling the economy.
Years of heavy money printing have failed to fire up inflation to the BOJ’s 2 percent target, forcing the central bank to maintain its massive stimulus despite the rising cost such as the hit to bank profits from near-zero rates.
The BOJ has come under fire from financial institutions for keeping the yield curve too flat with its policy of capping long-term interest rates around zero percent.
The central bank in July decided to allow long-term rates to move more flexibly around its target. But the move has done little to push up yields as investors expect subdued inflation to prevent the BOJ from raising rates any time soon.
As of March, 52 out of 106 regional banks have reported losses in the past two years or more on their lending business, according to the Financial Services Agency (FSA), highlighting the struggle to turn a profit outside Japan’s major cities.
Despite the strain on banks, Funo said the BOJ’s priority now was to keep stimulating the economy, to give the government and companies time to boost Japan’s growth potential through structural reforms and increased capital expenditure.
“Given recent price developments, we will not whittle down our powerful monetary easing for the time being,” he said.
Funo also said that while Japan’s economy is likely to continue expanding moderately, there were various uncertainties for the overseas economic outlook including escalating Sino-U.S. trade frictions.
The trade dispute will likely hurt China’s economy more than that of the United States, Funo said.
“The trade friction could potentially hurt Japanese business sentiment and investment via weakening Chinese growth,” he said.
“It’s something we should not take our eyes off.”
Japan’s core consumer prices rose 0.7 percent in September from a year earlier, remaining distant from the BOJ’s target, despite a steady economic expansion and a tightening job market.
Data on Wednesday showed inflation-adjusted real wages fell in September for a second straight month, as higher gasoline costs sap consumers’ purchasing power.
Heightening external risks also hang over the outlook for Japan’s economy, with analysts now projecting a contraction in the third quarter.
The BOJ’s nine-member board is split between those who prefer to focus on keeping monetary policy ultra-loose, and those who fret about the rising cost of prolonged easing.
Reporting by Leika Kihara; Editing by Chris Gallagher and Sam Holmes