Kuroda's deputy warns BOJ must limit side effects of easy policy

By Leika Kihara

SHIMONOSEKI, Japan (Reuters) - Bank of Japan Deputy Governor Masayoshi Amamiya said the central bank must contain the side effects of its policy to sustain massive stimulus, highlighting concerns over the pain prolonged easing is inflicting on the profits of financial institutions.

While warning of heightening global uncertainties, Amamiya said the best way to hit the BOJ's 2 percent inflation target was to support Japan's economic recovery by maintaining its current ultra-loose policy for as long as necessary.

"It will take time to change people's perception on prices formed during a prolonged period of low growth and deflation," Amamiya, one of the BOJ's two deputy governors, told business leaders in Shimonoseki, western Japan, on Thursday.

"But we're in a situation where we also need to pay more attention to the accumulating side effects of monetary easing," said Amamiya, among the key architects of the BOJ's stimulus measures whose views are closely watched by markets.

Not all in the BOJ, however, agree that maintaining the status quo would be the best approach, according to a summary of opinions at the central bank's rate review in January.

The summary showed one policymaker calling for the need to ramp up stimulus if risks escalate, underlining a rift in the board between those who want stronger steps to achieve the price target, and others who are worried about the rising cost of prolonged easing.

"The BOJ should stand ready to take policy action if risks to the economy and prices materialise," the board member was quoted as saying.

"When inflation is moving further away from our target, it's not a desirable approach to stand pat until a serious crisis occurs," said the board member, whose name was not identified in the summary released on Thursday.

The BOJ is caught in a dilemma. Years of heavy money printing have failed to fire up inflation, forcing the BOJ to maintain its massive bond buying programme despite financial institutions having to endure weak profits from near-zero rates.

The central bank now targets short-term interest rates at minus 0.1 percent and guides 10-year government bond yields around zero percent.

Japan's annual core consumer inflation hit a seven-month low of 0.7 percent in December. Many analysts expect price growth to grind to a halt in coming months due to a recent fall in oil prices and soft household spending.

Adding to the BOJ's headaches, a slowdown in the world economy has jolted markets and led the International Monetary Fund to cut its global economic growth forecasts.

While the trend is for Japan's economy to continue expanding, Amamiya said risk to the outlook were heightening from signs of slowing Chinese economic growth and the fallout from Sino-U.S. trade tensions.

"The effects of the trade tensions may spread, not only through the direct impact on trade, but through the damage on companies' investment appetite and the market's risk sentiment," he said.

(Additional reporting by Stanley White in Tokyo; Editing by Sam Holmes and Jacqueline Wong)