By Leika Kihara
KUMAMOTO, Japan (Reuters) - A Bank of Japan board member warned of potential dangers if the central bank's already massive stimulus is ramped up, a view suggesting there is no consensus on how quickly it should ease policy again to head off the risk of recession.
Hitoshi Suzuki, a former commercial banker turned BOJ policymaker, said on Thursday further declines in borrowing costs would do more harm than good as financial institutions might mitigate the pain by charging fees on households' deposits.
"If bank deposit rates effectively turn negative, it could hurt the economy by cooling consumer sentiment," Suzuki told business leaders in Kumamoto, southern Japan.
Excessively low interest rates would also discourage financial institutions from lending and diminish the impact of monetary easing, he added.
"Once the financial system destabilizes, it will become very difficult to achieve price stability," he said, stressing that the BOJ needed to pay more attention to the health of Japan's banking system in guiding monetary policy.
Suzuki's remarks underscore a rift within the nine-member board that could make it hard for Governor Haruhiko Kuroda to meet his pledge to ease policy "without hesitation" to underpin the economy's recovery.
Markets expect the U.S. Federal Reserve and European Central Bank to loosen policy next month to counter headwinds from a bitter U.S.-China trade war.
That is piling pressure on the BOJ to follow in their footsteps to prevent the yen from spiking against other currencies and hurting Japan's export-reliant economy.
ROOM FOR PRE-EMPTIVE STEPS?
While some like Suzuki fret about the rising cost of prolonged easing, other board members see room to act pre-emptively to prevent the economy from losing momentum to achieve the BOJ's elusive 2% target.
Suzuki said while heightening overseas uncertainties could hurt Japanese business and consumer sentiment, there was no sign yet that the economy was slipping into recession.
With borrowing costs already sliding near zero, the benefits of further yield falls would be smaller than in the past, he added.
"If the BOJ were to consider and implement specific monetary easing measures, it will take action deemed appropriate at the time while weighing the benefits and demerits of each step," Suzuki said.
The BOJ is in a bind. Years of aggressive money printing have crushed long-term interest rates and hurt profits of financial institutions by narrowing the margin they earn from borrowing cheap funds and lending at a higher rate.
It has also left the BOJ with little ammunition to fight another recession.
Under a policy dubbed yield curve control (YCC), the BOJ guides short-term rates at -0.1% and the 10-year government bond yield around 0% via heavy asset buying.
Cutting rates would undermine the purpose of YCC, which was intended not just to cap bond yields but to prevent them from falling too much and hurting commercial banks.
Adding to the BOJ's headaches, global bond yield falls have pushed down Japan's 10-year bond yield to -0.280%