By Leika Kihara

By Leika Kihara


KOBE, Japan (Reuters) - Bank of Japan board member Takako Masai on Wednesday advocated sticking with ultra-easy monetary policy due to uncertainty over how fast inflation will rise, while warning that the central bank should remain on guard against the possible side-effects.


Despite a strengthening economy, Masai conceded that it was taking longer than expected to eradicate Japan's sticky deflationary mindset, or public perceptions that prices won't rise ahead.


"Even so, there's no change to the need ... to conduct powerful monetary easing," Masai said in a speech to business leaders in Kobe, western Japan, adding that it was critical for the BOJ to keep showing its determination to hit its 2 percent inflation target.


"On the other hand, the BOJ must continue to very carefully watch the effects and side-effects" of its stimulus, she said, nodding to growing concern in markets that prolonged easing was taking a toll on Japan's banking sector by eroding margins.

Japan's economy expanded an annualised 1.4 percent in the third quarter due to strong exports, posting the longest period of uninterrupted growth in more than a decade.

But core consumer inflation rose just 0.8 percent in October from a year earlier, still well below the BOJ's target, as many firms remain wary of raising prices and wages due to pessimism over Japan's prospects for long-term growth.

"Personally, I think the risks to the economy are limited while those to prices are very high," Masai said.

"That's because it's highly uncertain to what extent changes in companies' price-setting behaviour will broaden."

The BOJ has been dropping subtle, yet intentional, hints that it could edge away from crisis-mode stimulus earlier than expected, sources say, though an actual exit from ultra-easy policy would be some time away.

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

Formerly a currency market strategist, Masai has voted with the majority of the board including last year's policy revamp.

(Reporting by Leika Kihara; Editing by Chang-Ran Kim & Simon Cameron-Moore)