BOJ says unconventional policies cannot replace traditional rate policy

By Leika Kihara and Makiko Yamazaki

TOKYO (Reuters) - The Bank of Japan said unconventional monetary easing, such as its ultra-easy policy of the past decade, carries potential uncertainties and side effects and cannot be a substitute for traditional interest rate policy.

In a policy review released on Thursday, the BOJ highlighted the various side-effects that unconventional steps can have, such as the distortion of the government bond market owing to the BOJ's massive bond buying.

The BOJ's unconventional, large-scale monetary easing since 2013 affected inflation expectations to some degree but was not effective enough to anchor inflation at 2%, it said.

"The Bank should not exclude at this point any specific measures when considering the future conduct of monetary policy," the review said.

"Looking ahead, in considering the implementation of each measure, it will be necessary for the Bank to design policy measures that can exert positive effects while minimising side effects as much as possible," it said.

The review said it was appropriate for the BOJ to maintain its 2% inflation target, and to continue guiding monetary policy from the perspective of meeting the price goal on a sustainable basis.

The review was an initiative Ueda announced when he took office in April last year to analyse the pros and cons of various unconventional monetary easing steps. The findings offer insight into what tools the BOJ would use - and prefer not to use - in dealing with the next economic downturn.

(Reporting by Leika Kihara and Makiko Yamazaki; Editing by Shri Navaratnam and Edmund Klamann)