By Leika Kihara


TOKYO (Reuters) - The Bank of Japan must lay the grounds for exiting its massive stimulus program by slowing asset purchases and raising its long-term interest rate target to 0.5 percent this year, a former central bank policymaker said on Wednesday.


With its huge buying distorting the bond market, the BOJ should start phasing out its stimulus regardless of whether U.S. President Donald Trump criticizes its ultra-easy policy as explicitly aimed at weakening the yen, former board member Sayuri Shirai said.


She said that to avoid having to top up an unsustainable pace of bond buying, the BOJ may have to raise its 10-year government bond yield target to 0.5 percent this year - from around zero - as global bond yields and domestic inflation pick up.


The BOJ this year should also reduce the annual scale of bond buying by around 30 trillion yen ($262 billion) because its purchases are already nearing the limit, Shirai said.

"The global environment surrounding monetary policy has clearly changed. Markets no longer expect central banks to keep easing forever," Shirai told Reuters.

"With these changes, the BOJ can make its policy framework more sustainable," said the one-time International Monetary Fund economist who served a five-year BOJ term that ended in March 2016.

Shirai said she did not expect BOJ policy to be a key topic in an U.S.-Japan economic dialogue to start in coming months, as central banks are given independence from political meddling in monetary policy decisions.

"The BOJ probably won't be included in the dialogue to protect its independence," said Shirai.

Once a vocal advocate of BOJ Governor Haruhiko Kuroda's radical monetary experiment, Shirai has recently warned of the rising cost of maintaining a massive stimulus for too long including in her recent book titled "Mission Incomplete".


In September, the BOJ revamped its policy framework to one more suited for a long battle to beat deflation, after three years of aggressive asset purchases failed to accelerate inflation to its 2 percent target.

It now buys government bonds to keep the 10-year yield around zero and applies a 0.1 percent charge on a small portion of commercial bank reserves deposited at the BOJ.

Policymakers in Tokyo were shocked by an accusation by Trump that Japan was using "money supply" to weaken the yen to give its exports an unfair advantage.

Trump refrained from making public criticism on BOJ policy at a weekend summit with Japanese Prime Minister Shinzo Abe, but the two agreed to set up a bilateral economic dialogue for talks on trade and other economic issues.

Some analysts warn that Washington may use the dialogue as a venue to criticize the BOJ's ultra-easy policy, and discourage the central bank from expanding stimulus.

Details on the dialogue remains sketchy, including whether the BOJ governor would participate.

"The BOJ governor may join the dialogue if summoned. But that would be odd and undesirable as monetary policy must be decided through debate at the nine-member board," Shirai said.

She said the BOJ's massive asset-buying program, deployed in 2013, helped reverse an excessive yen spike beyond 100 to the dollar around that time.

The central bank does not need to fret over current exchange-rate levels, she said, adding that a dollar/yen range of around 100 to 110 was appropriate for Japan.

The dollar stood around 114.40 yen on Wednesday.

(Additional reporting by Sumio Ito; Editing by Richard Borsuk)