TOKYO (Reuters) – The Bank of Japan has nearly exhausted its policy ammunition to boost the economy as deepening negative interest rates, seen as the most likely step if it were to expand stimulus, will do more harm than good, former BOJ Deputy Governor Toshiro Mutoh said.

Under a policy dubbed yield curve control (YCC), the BOJ guides short-term interest rates at -0.1% and long-term rates around 0% via huge asset buying to hit its 2% inflation target.

Mutoh, who retains influence on economic policy due to his close ties with incumbent financial bureaucrats, said it made sense for the BOJ to maintain its massive stimulus as inflation remained distant from its target.

But he questioned BOJ Governor Haruhiko Kuroda’s argument that the central bank could take short-term rates deeper into negative territory if the economy needed more stimulus.

“There are too many demerits to deepening negative rates,” Mutoh told Reuters in an interview conducted on Thursday.

“Even if the BOJ judged that it needs to ease, the tools available are limited. It would be hard for the BOJ to do anything more that would have a positive impact on the economy,” said Mutoh, currently honorary chairman at private think tank Daiwa Institute of Research.

The remarks by Mutoh, a former colleague of Kuroda during their stints at the Ministry of Finance, underscore the challenge the BOJ faces in balancing the need to support the economy and minimizing the strain put financial institutions’ profits by prolonged ultra-low interest rates.

Japan also has little room to deploy large-scale fiscal stimulus given its huge public debt, Mutoh said, warning against overly relying on spending packages to spur growth.

The BOJ’s ultra-loose monetary policy is keeping borrowing costs low. But that would change if improvements in the economy prod the central bank to raise rates, he said.

Since the collapse of Lehman Brothers in 2008 triggered a global financial crisis, Japan spent over 80 trillion yen ($731 billion) in 13 extra budgets compiled to fund stimulus packages – nearly the size of the country’s annual state budget.

In the past, extra budgets were compiled only to fill unexpected shortfall in funds caused by events such as a huge natural disaster. But it has become a regular practice in recent years as politicians sought to win votes with generous spending, even when the economy was in fairly good shape.

“It has become politically difficult not to compile a supplementary budget. This is a problem. It raises the question of whether such policy management is sustainable,” Mutoh said.

“Once Japanese government bonds lose market trust, it will become difficult for the government to freely issue debt.”

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