By Leika Kihara
NIIGATA, Japan (Reuters) - Bank of Japan board member Yukitoshi Funo said it would infringe on the government's jurisdiction over currency policy if the BOJ bought foreign bonds.
He said on Wednesday that while he wished to study the idea more carefully ahead of the bank's policy review next month, buying foreign bonds would be tantamount to currency intervention if it were aimed at keeping yen rises in check.
"It's possible for the BOJ to decide on buying foreign bonds at its policy meetings. But its current mandate isn't created in a way that allows it to guide policy to affect exchange rates," the former auto executive told a news conference after meeting business leaders in Niigata, northwestern Japan.
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"This isn't something that can be done immediately."
A majority of analysts expect the BOJ to ease monetary policy further at its September rate review, with economic growth having ground to a halt and inflation sliding further away from the central bank's 2 percent target.
But market participants are divided on what steps the BOJ could take given its dwindling policy options. Its aggressive bond buying is drying up liquidity and its negative interest rate policy has drawn criticism from financial institutions for squeezing their already-thin margins.
Some academics see room for more radical action by the BOJ.
Koichi Hamada, a Yale University professor and an adviser to premier Shinzo Abe, told Reuters that if government intervention in the currency market is deemed by the United States to be exchange rate manipulation, the BOJ could consider buying foreign bonds as an option to weaken the yen.
But many finance ministry and BOJ officials discount this idea, arguing that buying foreign bonds would be interpreted as violating a Group of Seven agreement to avoid competitive currency devaluations.
"Mr. Hamada seems to argue that the BOJ should buy foreign bonds to affect currency moves. That would be outside the BOJ's mandate," Funo said. "The BOJ guides policy to achieve price stability. It absolutely does not guide policy to influence currency or stock price levels."
Under Japanese law, the BOJ is prohibited from conducting trading that directly aims to influence exchange rates. It only intervenes in the currency market as an agent of the Finance Ministry, which makes the call on when to step in. As such, the BOJ has avoided buying foreign bonds to influence the yen, although it does trade modestly to manage foreign reserves.
Funo dismissed a growing market view that the BOJ was exhausting its policy options, saying he saw no signs the bank was reaching its limits in buying bonds or deepening negative rates.
The BOJ plans to review current policies at its September meeting and will analyze the factors that had hampered achievement of its price target, Funo said. The BOJ would then use those findings to sharpen its policy tools.
(Reporting by Leika Kihara; Editing by Kim Coghill and Eric Meijer)