By Leika Kihara and Yoshifumi Takemoto
TOKYO (Reuters) - Stubbornly weak price growth may mean the Bank of Japan will hold off on raising interest rates for years, with no exit from ultra-easy policy in sight unless it ditches its elusive 2 percent inflation target, former BOJ Deputy Governor Toshiro Muto said on Friday.
Inflation has not accelerated as much as the BOJ expected, Muto said, noting that the central bank itself produced projections in July showing that inflation won't reach its target in the next three years.
"As long as the BOJ sticks to its 2 percent inflation target, there's no choice but to maintain its current monetary easing," Muto told Reuters.
"Conditions aren't falling in place for the BOJ to ponder an exit," he said, shrugging off the chance the central bank may raise its yield target before inflation hits its goal.
Under its yield curve control policy, the BOJ now guides short-term interest rates at minus 0.1 percent and long-term rates around zero percent.
Weak price and wage growth has forced the BOJ to maintain a massive stimulus programme despite the rising costs of prolonged easing, such as the hit to bank profits from near-zero rates.
Japan's core consumer prices rose 0.9 percent in August from a year earlier, data showed on Friday, barely covering half the distance to the central bank's target.
Muto, who retains close contact with incumbent policymakers, said the BOJ's unconventional monetary easing steps are already having a "big negative impact" on regional banks' profits.
Such radical measures were intended to be a quick-hit solution to beat deflation, so maintaining them for too long could give rise to a host of negative implications, said Muto, currently honorary chairman of private think tank Daiwa Institute of Research.
"At some point, it might become difficult to even maintain the current policy as the demerits become so big," he said.
Delaying an exit from ultra-loose policy will also leave the BOJ with a lack of tools to fight another recession, Muto said.
That means fiscal policy may play a bigger role in reflating growth when Japan faces another economic downturn, he said.
Prime Minister Shinzo Abe, who won a third term as premier in a ruling party leadership race on Thursday, has signalled his intention to boost fiscal spending for disaster relief and infrastructure.
"Easy monetary policy and fiscal spending work well together," Muto said. "We might see fiscal policy shoulder a bigger burden in supporting the economy."
(Reporting by Leika Kihara)