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. 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.