By Yoshifumi Takemoto and Leika Kihara
TOKYO (Reuters) - The Bank of Japan must immediately end its negative interest rate policy as it has allowed companies to delay efforts to boost productivity by keeping borrowing costs ultra-low, said ruling party heavyweight Shigeru Ishiba.
"It's an extreme policy that shouldn't exist in the first place," Ishiba said of negative interest rates, adding that ultra-low rates can be justified only in times of crisis.
When asked whether he meant the BOJ should end negative rates as soon as possible, Ishiba said: "Yes, I believe so."
Since 2016, the BOJ has kept short-term rates at -0.1% and the 10-year bond yield around zero as part of efforts to reflate growth and fire up inflation to its 2% target.
"When the interest rate, or the price of money, is zero, market function doesn't work properly," leading to inefficient use of funds and discouraging firms from boosting productivity, Ishiba told Reuters in an interview on Monday.
While stressing the need to end negative rates soon, Ishiba said the BOJ may not be able to do so very soon as it could face political pressure to keep funding costs low for an expected huge spending package to rebuild areas hit by a major quake on Jan. 1, Ishiba said.
"Given the quake, things might not proceed as (BOJ Governor Kazuo) Ueda might have envisaged," he said on prospects for ending negative rates in the near-term horizon.
An outspoken Liberal Democratic Party (LDP) lawmaker, Ishiba consistently ranks as among the most favourite candidates to become next prime minister in opinion polls.
With the party's political scandal jolting the administration, Ishiba - who holds no cabinet post and does not belong to any faction - may see his influence increase as a future contender for the top job, some analysts say.
With inflation exceeding its 2% target for well over a year and heightening prospects of sustained wage gains, many market players expect the BOJ to end negative rates in March or April.
Ishiba has long been a critic of former governor Haruhiko Kuroda's radical monetary stimulus, which was part of former premier Shinzo Abe's "Abenomics" policies to prop up growth.
The recent rise in inflation is likely driven by the weak yen, which pushes up the cost of imports, rather than via the boost to growth from decades of ultra-low interest rates, Ishiba said.
"We need to seriously consider how long we can continue with ultra-low interest rates," he said, calling on the need for deeper scrutiny on how a future rate hike could affect not just the cost of funding Japan's huge debt, but the overall economy.
On the potential fallout from the U.S. presidential election, Ishiba said a possible victory by Donald Trump will lead to more protectionism and heighten risks to Japan's export-reliant economy.
"If Trump makes a come-back, Washington's policies will probably turn even more U.S.-centered than during his previous term," Ishiba said.