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BOJ's bank aid scheme may herald new era for monetary policy, says ex-c.banker

* BOJ’s bank aid scheme looks more like growth strategy - Hayakawa

* Channeling money to particular sector may become new c.bank tool

* ECB idea of buying more green bonds signals change in c.banking

* Adds central banks already veering into realm of fiscal policy

TOKYO, Nov 17 (Reuters) - The Bank of Japan has opened up a new policy frontier with a scheme that gives regional lenders incentives to consolidate - de facto subsidies to boost the economy’s growth potential, a former BOJ executive said.

The central bank last week unveiled a scheme under which it will pay 0.1% interest on deposits held by regional lenders that cut costs, boost profits or consolidate. It has said the scheme is aimed at keeping Japan’s banking system stable, and is not tied to monetary policy.

But Hideo Hayakawa, the BOJ’s former top economist, said the scheme may offer an unintended breakthrough for the central bank, which is struggling to deal with economic woes amid ultra-low rates and a dwindling tool-kit.

“Market interest rates have fallen near limits, so it isn’t surprising for central banks to consider ways to affect the natural rate of interest - or potential growth,” he told Reuters in an interview, calling the scheme more a growth strategy than macro-prudential policy.

Hayakawa cited the European Central Bank’s increased interest in buying more green bonds as another example of how ultra-low rates are shifting the focus of monetary policy towards revitalising particular industries.

“The new frontier of monetary policy may be to come up with ways to boost an economy’s natural rate of interest,” said Hayakawa, who retains contact with incumbent policymakers.

“Some may argue this is not the realm of central banks. But central banks are already embarking on far more radical steps close to fiscal policy,” such as purchases of corporate debt, he added.

During Hayakawa’s decade-long tenure as BOJ executive until 2013, the bank ramped up government bond buying and introduced a framework to buy riskier assets such as exchange-traded funds (ETFs) to combat a damaging yen spike and grinding deflation.

The BOJ adopted negative rates and a cap on long-term yields in 2016, leaving itself with a dearth of ammunition to support an economy suffering from the coronavirus pandemic. (Reporting by Leika Kihara; Editing by Edwina Gibbs)

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