MNI: BOJ Kuroda: Far From 2% CPI; Price, Wage Rises To Be Slow

     TOKYO (MNI) - Bank of Japan Governor Haruhiko Kuroda reiterated the central

bank's cautious optimism that wage hikes and retail price rises will eventually

spread but the pace will remain gradual because of continued cautious behavior

by firms and workers.

     He also repeated for an economic seminar that there is still some distance

before the BOJ achieves its 2% price stability target, which is why the central

bank will continue to tenaciously conduct its aggressive monetary easing policy

launched more than four years ago.

     Asked whether the BOJ might not have room to target a lower inflation rate

than 2% if the economy is growing steadily, Kuroda replied, "I still think it is

important to target 2%, not below."

     The BOJ believes that the current yield curve control target's are

"appropriate" for pursuing balanced economic growth and stable 2% inflation, and

that it is "causing no difficulties" for the economic activity or the financial

system, he said.

     "However, our judgment will change in line with conditions in the economy,

prices and financial markets," he said.

     The BOJ watches closely whether risk premiums are falling based on various

factors, such as corporate profits, dividend payments, share prices and interest

rate levels.

     Commenting on the BOJ's large purchases of exchange-traded funds (ETFs) as

part of its QQE policy, Kuroda said the central bank is aiming to lowering risk

premiums, which in turn should help make both households and firms become active

in spending and investing.

     Analyzing the recent economic climate, Kuroda said there has been only a

moderate improvement in wages despite the tightness in labor market conditions.

     "In particular, it is noticeable that wage increases for full-time

employees are sluggish, compared to those for part-time employees," he said.

"Since scheduled cash earnings of full-time employees account for almost 70% of

the total employee income, their impact is not small".

     Both Japanese labor and management are placing priority on the long-term

stability of employment and wages over any increase in the pace of pay hikes, he

noted.

     In addition, the pass-through of wage costs to sales prices has not been

observed widely yet, the governor said.

     "This reflects firms' efforts to absorb increased wage costs through, for

example, labor-saving investment that makes use of information technology," he

said.

     Software investment has been increasing significantly in industries where

labor shortages are particularly acute, such as restaurants, retail outlets, and

construction firms, he added.

     "While these efforts are based on individual firms' reasonable business

strategies with a view to raising productivity, they reduce the upward pressure

on prices in the economy as a whole," he warned.

     However, Kuroda pointed to some bright spots in the outlook.

     First, tightening labor conditions should lead to an increase in wages for

full-time employees, he predicted.

     "It's also an important fact that a base pay rise, which did not take place

under deflation, has occurred for four consecutive years since 2014," he said.

     "In order to create a virtuous cycle between moderate rises in prices and

increases in corporate profits and income, it should be widely recognized in

society that wages rise continuously under a sound economy."

     Second, firms are likely to gradually shift toward raising prices, the

governor said.

     "It seems that consumers are gradually accepting price rises as a result of

 improvements in the employment and income situation," he said.

     However, Kuroda predicted that the road to a steady rise in prices will

remain bumpy, with some firms deciding to raise prices while others remain

hesitant for the time being.

     Eventually, most firms are expected to raise prices, he said.

     "However, it is not easy to clearly point beforehand to when this will

happen,  because the specific timing when firms' stances shift toward raising

prices is likely to vary, depending on developments in demand that each firm and

industry faces, or on their cost structures."

     "The CPI, which reflects these developments, is likely to increase

moderately going forward," he concluded.

     Looking ahead, Kuroda repeated, "There is still a long way to go before we

achieve the 2% price stability target."

     He defended the stimulative effects of the quantitative and qualitative

easing the BOJ began in April 2013, saying, "It is clear from the results so far

achieved that QQE has been effective in drastically improving Japan's economy."

     Kuroda also repeated that the yield curve control policy framework adopted

in September 2016 is designed to be "highly sustainable."

     "Going forward, in line with the steady improvement in the economy, firms

are likely to gradually shift toward raising wages and prices," he said.

     "Moreover, people's medium- to long-term inflation expectations are

projected to rise steadily as additional prices rises come to be widely

observed."

     The BOJ will continue to "persistently pursue powerful monetary easing"

under the current QQE framework with yield curve control with a view to

achieving the price stability target of 2%, he said.

     It will also continue to pay close attention to both upside and downside

risks to growth and inflation, he said, adding that it is no longer the case

that risks are likely to be skewed to the downside.

     As for BOJ's massive purchases of Japanese government bonds, Kuroda said,

"The BOJ's JGB purchases have been conducted in a smooth manner thus far and the

BOJ expects that the risk of having a problem in terms of continuing with its

JGB purchases is small for the time being."

     The BOJ is currently committed to buying JGBs at an annual pace of about

Y80 trillion but the scale of its purchase has fallen to an annualized pace of

about Y50 trillion as the drop in bond yields has enabled the BOJ to reduce its

bond buying.

     "...if supply-demand conditions in the JGB market tighten in the future,

the impact of a unit amount of BOJ JGB purchases on long-term yields accordingly

should become more significant, with all else being equal," Kuroda said.

--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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