BOJ's Masai urges banks to adjust business model amid new challenges

By Stanley White

TOKYO (Reuters) - Japan's banks should adapt to the challenges of a declining population and the rise of financial technology, with the discussion of these structural problems kept separate from monetary policy, a Bank of Japan board member said on Thursday.

Takako Masai acknowledged that easy monetary policy had lowered banks' lending margins but noted that this had been going on since the 1990s. The BOJ needs to focus more on the accumulative impact of its monetary easing and any side effects, she said in a speech posted on the BOJ's website.

"Structural problems - which will have an impact on financial institutions' business environment - and the effects of monetary easing should be analysed and discussed independently of each other," she said in the text of the speech. Upward momentum in prices was intact, she said, arguing the BOJ should stick with its current easing programme.

Masai's comments may dampen speculation that the BOJ would change its negative interest rate policy or consider allowing long-term rates to rise to ease pressure on banks' margins.

Under its current framework, the BOJ keeps the interest rate on short-term debt at minus 0.1 percent and buys up government debt to keep the benchmark 10-year yield around zero percent.

Commercial banks have complained that this policy makes it more difficult to earn money from lending, but Masai said the onus was on banks to adapt their business models.

The BOJ needs to carefully monitor the impact its easing is having on bond market liquidity, especially since trade volumes and price volatility have fallen recently, she said.

The central bank is likely to cut its price growth forecasts at a policy meeting ending on July 31 as long-term inflation expectations stall, sources told Reuters on Tuesday.

Prices have been "slightly weak" since the BOJ last published forecasts in April, but upward price momentum remains intact, Masai said. There is no reason to be overly pessimistic on prices, she said.

The BOJ has struggled to meet its 2 percent price target because 15 years of deflation have anchored a deflationary mindset, she said, noting that the belief that deflation should be avoided at all costs is weaker in Japan than other countries.

One risk to the outlook is the government's plan to raise the nationwide sales tax to 10 percent from 8 percent in 2019, although the government plans to find ways to soften the blow, Masai said.

(Editing by Eric Meijer and Jacqueline Wong)