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BOJ will not face big long-term losses when it unwinds stimulus: Harada

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The Bank of Japan will not face big losses in the long run when it eventually begins to tighten monetary policy, board member Yutaka Harada said on Thursday, seeking to address concerns of some market players.

[GIFU, Japan] The Bank of Japan will not face big losses in the long run when it eventually begins to tighten monetary policy, board member Yutaka Harada said on Thursday, seeking to address concerns of some market players.

When the BOJ does tighten policy, it will sell its bond holdings and raise the interest it pays on the excess reserves to mop up liquidity from markets, Mr Harada said.

"It is of course possible that the BOJ may register losses because it will receive low interest rates while paying high interest rates," Harada said, adding such losses may be temporary.

But government bond yields would be higher when inflation is accelerating enough for the BOJ to withdraw stimulus, he told business leaders in Gifu, central Japan.

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"The BOJ will always make a profit in the long run as it can buy high-yielding government bonds using cash and current account deposits that carry almost no cost," he said. "Thus, the BOJ will not make potentially dangerous losses in the long run."

Under its yield curve control policy, the BOJ pays 0.1 per cent interest on excess reserves financial institutions park with the central bank, while buying huge amounts of government bonds to cap 10-year bond yields around zero per cent.

On the prospects for prices, Mr Harada said he expects inflation to accelerate as the jobless rate nears 2 per cent.

Inflation is now barely picking up due to weak private consumption and is nowhere near the BOJ's target of 2 per cent.

"Japan's jobless rate has already fallen to 2.8 per cent. If this trend continues and the jobless rate falls further, there's no doubt prices will rise," he said.

A former academic, Mr Harada has voted with the majority of the board since joining the BOJ in 2015.

The BOJ's balance sheet swelled after the adoption in 2013 of its "quantitative and qualitative easing" (QQE) programme that aimed to accelerate inflation to 2 per cent through huge purchases of government bonds and private assets.

After years of asset buying failed to drive up inflation, the central bank added negative interest rates to QQE in January 2016 and revamped its policy framework in September to one that aims to control the yield curve.

Growing signs of life in Japan's economy have presented the BOJ with a fresh communications challenge, pushing it to be clearer with markets on how it might scale back its stimulus - even though such action remains a long way off.

The central bank saw interest payments on its huge bond holdings decline for the first time in five years in the fiscal year that ended in March, a sign that its ultra-loose monetary policy was taking a toll on its financial health.

REUTERS

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