By Leika Kihara and Stanley White
TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda stressed the need to look at the impact monetary policy has on the banking system and said changes in the economy could trigger a hike in the bank's yield targets, offering the strongest signal to date it may edge away from its crisis-mode stimulus programme.
Kuroda said that while it was premature to debate specifics now, the BOJ's future communication would focus on how to exit from quantitative easing without disrupting financial markets.
"At present, we consider the current shape of the yield curve as appropriate," though this could change depending on how the economy and prices perform, as well as how the BOJ's easy policy affects Japan's banking system.
"In accordance to such changes, we will consider where our short- and long-term rate targets should be in order to create an appropriate shape of the yield curve," he said, suggesting the BOJ's focus was now on when to dial back, not ramp up, its massive stimulus programme.
Under a policy framework adopted last year, the BOJ now guides short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent.
Kuroda said the BOJ was "very mindful" of the impact its ultra-easy monetary policy was having on financial institutions' profits via narrowing margins, particularly on regional banks suffering from a lack of fund demand and a dwindling population.
"Both financial and price stability are important policy mandates for the BOJ," Kuroda said, in a departure from his usual stance of putting more emphasis on achieving the BOJ's price target than on the impact its policy is having on the banking system.
Kuroda repeated it was too early to debate which steps, and in what order, the BOJ should take when withdrawing stimulus, saying communicating the strategy now would cause market confusion.
But he said the BOJ has the necessary tools and means to achieve a smooth exit from quantitative easing.
"When considering our future communication with markets, an exit from quantitative and qualitative easing would be quite an important topic," he said.
Despite an improving economy, Japan's consumer prices have remained stubbornly weak and well below the BOJ's 2 percent inflation target. As a result, most economists surveyed by Reuters expect the BOJ will not start unwinding stimulus until later next year or beyond.
(Editing by Minami Funakoshi, Sam Holmes and Kim Coghill)