By Leika Kihara and Stanley White
TOKYO (Reuters) - Bank of Japan Deputy Governor Hiroshi Nakaso said the central bank would not rule out deepening negative interest rates or any other easing steps needed to achieve its price target.
Nakaso said the BOJ's comprehensive assessment of its policy effects to take place later this month will look at ways to accelerate achievement of its 2 percent inflation target. It will not discuss ways to withdraw its ultra-loose monetary policy.
Nakaso declined to comment about speculation that the BOJ could resort to buying foreign-currency denominated bonds. He ruled out targeting the foreign exchange market with monetary policy.
While inflation is expected to resume a gradual uptrend, uncertainty persists on whether such price rises will heighten inflation expectations, Nakaso said.
"Based on a candid assessment, we will decide whether or not it will be necessary to make adjustments to the current policy framework, and if judged necessary, in what way it should be adjusted," Nakaso said in a speech on Thursday.
Under its current framework combining negative rates with hefty buying of government bonds and some riskier assets, the BOJ has gobbled up a third of Japan's bond market and attracted criticism from banks for squeezing already thin profit margins.
Sources have told Reuters the BOJ will consider modifying its policy framework and debate some of the unintended consequences of its ultra-loose policy at the rate review Sept 20-21.
The BOJ will not abandon its 2 percent price target, Nakaso said, adding that there was little sense in debating whether to abandon its two-year deadline for attaining the price goal as three-and-a-half years have elapsed since the BOJ began quantitative easing.
Nakaso acknowledged the BOJ's decision in January to adopt negative rates may impair financial intermediation by hurting financial institutions' profits, if maintained for a long time.
The BOJ will pursue its massive asset-buying program and negative rates by "striking the right balance" between the program's powerful policy effects and possible impairment of financial intermediation, Nakaso said.
But that does not mean the central bank will rule out any further cuts in the negative interest rate, he added.
"Depending on economic, price situations and financial conditions, further measures may still deemed necessary" after weighing the benefits and costs of current policies, he said.
When asked about calls from some academics such as Prime Minister Shinzo Abe's adviser Koichi Hamada for the BOJ to buy foreign bonds, Nakaso said he couldn't comment because he did not know in what context such calls are being made.
"The BOJ conducts monetary policy for the domestic purpose of hitting its inflation target, not for influencing exchange rates," he told reporters.
The BOJ eased monetary policy in July and pledged to conduct a comprehensive assessment of its policies at this month's rate review. A majority of analysts polled by Reuters expect the bank to expand stimulus again at the meeting.
(Reporting by Leika Kihara and Stanley White; Editing by Chris Gallagher and Eric Meijer)