BOJ Kuroda: Japan CPI Low, BOJ Policy Unaffected by Fed's

     TOKYO (MNI) - Bank of Japan Governor Haruhiko Kuroda repeated Thursday that

the central bank won't let a rise in U.S. interest rates lead to a premature

rise in domestic borrowing costs as there is still a long way to go to reach the

bank's 2% inflation target.

     Kuroda said the BOJ's policy is not directly affected by that of the U.S.

Federal Reserve, which on Wednesday decided to shrink its balance sheet starting

in October and made clear another rate hike was possible before the end of the

year.

     The Fed's decision is based on its assessment of the U.S. and global

economies, Kuroda told a press conference here, stating the Fed will continue

conducting "appropriate" monetary policy.

     "Even if U.S. interest rates rise due to the Fed's monetary policy, we will

not raise the target for long-term interest rate," Kuroda said.

     Under the yield curve control policy framework, the BOJ has been guiding

the overnight interest rate at -0.1% and the 10-year bond yield around zero

percent.

     Low inflation in Japan means BOJ policy differs from the monetary policy

stance of other central banks, Kuroda said.

     The BOJ is trying to form an ideal yield curve that is consistent with

achieving its 2% inflation target, Kuroda said, adding its policy is not based

on certain assumptions about stock market levels or foreign exchange rates.

     Kuroda said some market data showed that the liquidity in Japanese

government bond markets is increasing while market surveys showed some investors

believe the liquidity is still low.

     "Some data showed that functioning in JGB markets is improving but some

market surveys showed that functioning remains depressed. There is a gap between

market data and surveys but I don't think there are any problems," he said.

     Despite the slow rise in actual inflation and inflation expectations,

Kuroda said there is no need to reinforce already large monetary stimulus at

this point.

     However, he repeated that the central bank would do what it takes reach the

2% target. "We will conduct additional easing if necessary, as we said in the

policy statement."

     The BOJ repeated in its statement released after the latest two-day policy

meeting that ended earlier Thursday that it would "make policy adjustments as

appropriate, taking account of developments in economic activity and prices as

well as financial conditions, with a view to maintaining the momentum toward

achieving the price stability target."

     The BOJ board decided in an 8-to1 vote to maintain its current monetary

easing stance under the yield curve control framework it adopted about a year

ago.

     One of the two new board members, Goushi Kataoka, dissented, arguing

current policy was insufficient to meet the central bank's 2% policy goal by the

current target date of sometime in fiscal 2019, according to the BOJ's policy

statement following its meeting.

     Kataoka was quoted as citing "an excess supply capacity in capital stock

and the labor market" as the reason for his objection but the statement didn't

show any counter-proposals made by him.

     In July, the BOJ pushed back the timeframe for hitting the 2% inflation

target to "around fiscal 2019" from the previous estimate of "around fiscal

2018." It was the sixth delay since the bank began aggressive easing in April

2013.

     Kataoka also opposed the description of the board's inflation outlook.

     Although the year-on-year rate of change in the CPI is likely to increase

for the time being, reflecting developments in crude oil prices and foreign

exchange rates, the possibility of the rate of change increasing toward 2% "from

2018 onward" is low at this point, Kataoka told the board.

     Kuroda declined to disclose the board's debate on the points made by

Kataoka.

     Some details of Kataoka's argument will become available through the

summary of opinions presented at the latest policy meeting, which will be

released on Sept. 29. The minutes of the Sept. 20-21 meeting are due on Nov. 6,

following the next policy meeting on Oct. 30-31.

     "We are trying to achieve the 2% price stability target as soon as

possible," the governor said but acknowledged that the year-on-year rise in the

core CPI (excluding volatile fresh food prices) is still low at 0.5%.

     Kuroda explained the slow progress in achieving stable 2% inflation by

pointing to the stubborn deflationary mindset among businesses and households as

well as consumers' reluctance to accept higher prices when wage growth remains

low.

     Some firms are capping labor costs amid a tightening labor supply by

streamlining their operations with new machines and shortening business hours,

Kuroda said.

     This move helps raise the economy's productivity but will not raise

consumer prices, he added.

     To capture the price trend clearly, the BOJ will also monitor the

"core-core" CPI, which excludes both fresh food and energy costs, when there is

a large fluctuation in energy prices, Kuroda said.

     The BOJ will monitor geopolitical risks heightened by North Korea's nuclear

arms threat as they affect financial markets, Kuroda said.

     Safe-haven buying of the Japanese currency due to the North Korean risks

has been limited. The yen has depreciated against the dollar as the U.S Federal

Reserve has unwound its monetary easing in line with the U.S. economic recovery.

     Among other risks to the outlook, Kuroda declined specific comment on

concerns about the slow progress in the government's fiscal consolidation

efforts but said fiscal discipline affects the government bond market.

     "It is important for the government to keep fiscal discipline and to

maintain the sustainability of fiscal conditions. We are closely watching fiscal

conditions and discipline as they would affect JGB yields," Kuroda said.

     The reported plan by Prime Minister Abe to dissolve the Lower House of

parliament next week and call an early election for next month is expected to

further delay the process of fiscal consolidation, as he plans to use the sales

tax hike now planned in October 2019 to fund his latest project of providing

free university education.

     As for the BOJ's massive purchase of exchange-traded funds (ETFs), Kuroda

repeated his previous comments that the ETF buying is aimed at lowering risk

premiums, and not at pushing up stock prices.

     "ETF buying isn't linked to stock price moves and we would not change

monetary policy due to stock price fluctuations," he said.

     "ETF buying isn't as important as the yield curve control policy but it is

still necessary for us to achieve the 2% price target."

     In July 2016, the BOJ board decided to increase the scale of its ETF

purchases to Y6.0 trillion from Y3.3 trillion to stabilize financial markets

after Britain's vote to leave the European Union.

     Economists have warned that the BOJ's purchases of ETFs are so large they

are distorting the functioning of the stock market and so stock prices.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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