Kuroda says BOJ will signal exit plan if prices pick up, warns of risks

By Leika Kihara

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda said the central bank will telegraph to markets how it plans to exit from ultra-easy policy when conditions for hitting its price goal become robust.

But he said it was premature to debate when the BOJ could whittle down its massive stimulus programme, with inflation distant from its 2 percent target.

"We will communicate specifics on how we plan to exit once inflation accelerates toward 2 percent and conditions for hitting our target gradually fall into place," Kuroda told the upper house of parliament in a semi-annual testimony on Tuesday.

"For now, we don't think conditions are rife to consider specific timings for an exit," he said. "The BOJ won't end its ultra-easy policy before inflation reaches 2 percent."

The BOJ has various tools to mop up excess funds and can learn from other central banks in seeking to smoothly dial back stimulus, Kuroda said.

Japan's core consumer price growth slowed in April for a second straight month, underscoring the view weak inflation will keep it from dialling back stimulus any time soon.

But central bank policymakers have begun brainstorming ways to edge away from crisis-era policy given the rising cost of prolonged easing, such as the pain ultra-low rates is inflicting on financial institutions, sources say.

Kuroda said that while the BOJ will "patiently maintain powerful" monetary easing, he was mindful of the need to take into account the side effects of its massive stimulus.

"We will guide monetary policy taking into account its side effects such as its impact on financial institutions, particularly regional banks," he said.

DOMINATING BOND MARKETS

After nearly three years of heavy money printing failed to accelerate inflation to its 2 percent goal, the BOJ revamped its policy framework in 2016 to one better suited for a long-term battle to lift Japan sustainably out of deflation.

While the BOJ has slowed its bond-buying to half the level it loosely commits to buy, some analysts say it could soon run out of bonds to buy as years of huge purchases dry up liquidity.

The central bank kept up its pace of bond-buying even as the government reduced monthly debt issuance from the start of the current fiscal year in April.

That has boosted the BOJ's already dominant presence in the market. The central bank gobbled up 79 percent of bonds sold to the market in April, up from 70 percent in March, according to Mizuho Securities. It bought nearly all 5-year and 10-year bonds issued during the month.

Despite subdued inflation, many BOJ policymakers are wary of ramping up stimulus due to the rising cost of prolonged easing and the bank's dwindling policy ammunition.

But some advocates of aggressive easing in the nine-member board, including new deputy governor Masazumi Wakatabe, could complicate debate of a future exit.

"My feeling now is that we can achieve our inflation target with the current policy," Wakatabe told the same parliament hearing. "But that's my view now. If conditions change and our current policy becomes inappropriate, we may need to change policy."

(Additional reporting by Hiroyasu Hoshi; Editing by Chris Gallagher & Shri Navaratnam)