BOJ's Sato calls for raising yield targets flexibly

Bank of Japan board member Takehiro Sato said the central bank should raise its bond yield targets flexibly if economic and price improvements boost long-term interest rates.

Sato also said the BOJ should not persist in maintaining the current pace of government bond purchases and consider reducing its massive holdings of treasury discount bills, since it now targets interest rates and not the pace of money printing.

"In my view, the yield curve that would be most appropriate for achieving favourable conditions in economic activity and prices should be a little steeper," Sato told business leaders in Tokushima, western Japan, on Wednesday.

"It is appropriate to flexibly adjust" the BOJ's yield curve targets if market long-term interest rates rise reflecting improvements in the economy and price outlook, said Sato, a former market economist.

Under a new policy framework adopted in September, the BOJ now guides short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent.

The BOJ's attempt to control the yield curve has faced challenges as rises in global long-term interest rates, driven by expectations of steady rate hikes by the U.S. Federal Reserve, have put upward pressure on Japanese long-term rates.

Sato, whose five-year term ends in July, has consistently voted against the policy, arguing that pegging yields at such low levels could hurt Japan's banking system by hitting financial institutions' already narrowing margins.

Sato offered an upbeat view on Japan's economy, saying that core consumer inflation may exceed 1 percent in the latter half of the current fiscal year ending in March.

Such rises in inflation may push up Japanese long-term rates, though the BOJ shouldn't persist in capping the longer end of the yield curve, he said.

The BOJ should allow for a natural steepening of the yield curve, which could mean slowing its bond purchases, to prevent companies from holding off capital expenditure on expectations that current ultra-low borrowing costs will persist, he said.

Japan's January core consumer prices likely stopped falling for the first time in nearly a year, a Reuters poll showed, due to a pickup in energy prices and the global economic recovery.

Still, inflation remains distant from the BOJ's 2 percent target on weak consumption and wage growth, keeping the central bank under pressure to maintain its ultra-easy monetary policy.

The BOJ abandoned its policy targeting the pace of money printing and switched to one targeting interest rates in September, after three years of aggressive asset purchases failed to accelerate inflation to 2 percent.

But the nine-member board is split on how much emphasis the BOJ should place on the pace of its huge bond buying.