* BOJ sought to contain damage by dropping price goal timeframe
* Ditching negative rates, risky asset buying difficult
* Board could allow long-term yields to rise more - Kiuchi
* BOJ will put more focus on how policy affects banking system
By Leika Kihara
TOKYO, May 8 (Reuters) - Many Bank of Japan policymakers have set their sights on exiting from ultra-easy monetary policy and will favour raising interest rates if the economy continues to recover, former central bank board member Takahide Kiuchi told Reuters on Tuesday.
With inflation subdued, the central bank likely gave up on hitting its 2 percent target anytime soon and sought to contain damage to its credibility by removing any reference to a timeframe for reaching the price goal last month, he said.
Unless it waters down its inflation target further, the BOJ would struggle to justify abandoning negative interest rates or slow purchases of risky assets as it pledges to maintain these steps until inflation hits 2 percent, Kiuchi said.
But the central bank could allow 10-year bond yields to rise more or target shorter-term rates such as five-year yields, given the rising cost of capping 10-year yields at zero, he said.
“The BOJ could do this anytime and will probably explain it as a fine-tuning of its policy, not monetary tightening,” said Kiuchi, who served on the BOJ’s nine-member board until July.
“Many people in the BOJ have their eyes set on an eventual policy normalisation. It’s clear that advocates of aggressive easing have become a minority on the board,” he said.
During his stint at the BOJ, Kiuchi has been a lone dissenter of Governor Haruhiko Kuroda’s radical stimulus and consistently called for slowing its asset purchases on the view that seeking to achieve its price target hastily won’t work.
After he left, the BOJ is doing just that - slowing its bond buying and ditching a timeframe for hitting its target.
Minutes of recent BOJ policy meetings show an increasing number of board members voicing concern over the rising cost of prolonged easing, a sign their focus is shifting away from the price target, he added.
“Years of radical easing have hurt financial institutions, a cause of concern for many BOJ officials,” said Kiuchi, who retains deep insight into the workings of BOJ policy.
“From now on, the BOJ will put more attention to how its policy is affecting the banking system.”
The BOJ last month removed any reference to a timeframe for hitting its 2 percent inflation target, in a surprise move analysts said was aimed at keeping market expectations for more stimulus in check.
The central bank now guides short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent. It also buys government bonds and risky assets such as trust funds investing in stocks and property. (Additional reporting by Takashi Umekawa Editing by Jacqueline Wong)