MNI: Ex-BOJ Hayakawa: BOJ Needs To Change Policy Framework

--Hayakawa: BOJ Should Aim To Achieve 2% CPI In Longer Term

--Hayakawa: BOJ Should Cut JGB, ETF Purchases

     TOKYO (MNI) - A former senior Bank of Japan official said Wednesday that

the BOJ should adjust its monetary policy framework, as Japan's modest economic

recovery could run out of gas before the 2% price stability target is achieved.

     "The BOJ's 2% price target will not be achieved in the near future and I'm

concerned about the risk that Japan's economy will fall into recession before

the target is achieved," Hideo Hayakawa, former BOJ chief economist and

currently senior executive fellow at Fujitsu Research Institute, told reporters.

     He added that if the economy fell into recession before the BOJ could push

up inflation to a stable 2% from under 1% now, the BOJ would run out of

effective monetary easing tools.

     "The BOJ should change its 2% target to a medium- to long-term price target

and reduce the scale of its purchases of Japanese government bonds" and

exchange-traded funds, Hayakawa said.

     Hayakawa was one of six executive directors at the BOJ supporting the

governor from March 2009 to March 2013 after serving as the chief economist for

the central bank.

     Data released Wednesday showed that Japan's economy expanded for the

seventh straight quarter in July-September, the longest sustained growth period

in 16 years, but that consumption lacks strength and global demand remains

uncertain.

     In September, Japan's economy seemed to have surpassed the second-longest

postwar expansion period that lasted for 57 months, from November 1965 to July

1970.

     If the economy continues to grow until January 2019 before the next sales

tax hike planned in October that year, it would exceed the longest post-war

expansion period that stretched for 73 months from February 2002 to February

2008.

     But Hayakawa said the current economic recovery is unlikely to last that

long.

     Japan's economy is likely to grow more than 1% this and next fiscal years,

but the annual inflation rate, measured by the year-on-year rise in the core

consumer price index (excluding fresh food), will not rise to 2% in the

foreseeable future, Hayakawa said.

     "Private economists forecast the rise in consumer prices to peak at 0.7% to

0.8% in September or October. I think consumer prices will rise a little more

but I don't think they will even stabilize around 1%," he said.

     The current BOJ estimate is to achieve the 2% price target sometime in

fiscal 2019, but economists on average forecast a rise of just 0.7% in core CPI

for that year.

     In September, the core CPI rose 0.7% on year but the core-core CPI

excluding fresh food and energy gained only 0.2%, indicating the recent slow

increase in inflation owes much to year-on-year rises in fuel prices and utility

costs.

     "The focus is on whether the underlying trend of consumer prices

strengthens this year and the important point is how wage hikes for non-regular

workers will affect service prices," he said.

     Hayakawa also voiced concern over the outlook for private consumption,

which will be hit by the recent rise in the cost of living amid slow wage hikes.

     "A drop in real wages to be caused by higher consumer prices will dampen

consumer spending," he said.

     Total monthly average cash earnings per regular employee in Japan rose 0.9%

on year in September, posting the second straight year-on-year rise, but

continued to mark a slight drop from a year before after being adjusted for

inflation.

     Hayakawa added that social security premium payments by households are

rising and set to rise further given the falling working population, which will

reduce purchasing power and weigh on consumer spending.

     He repeated his argument that in unwinding its large-scale monetary

stimulus, the BOJ should target the yields of shorter maturities, instead of

raising its target for the 10-year Japanese government bond yield from the

current target of around zero percent.

     The BOJ won't be able to raise the interest rate target for the 10-year

JGB, the benchmark for borrowing costs for businesses and households, because

the year-on-year rise in the CPI is unlikely to steadily rise past 1% toward the

bank's target of 2%, he said.

     Previously, Hayakawa thought the BOJ would raise its 10-year yield target

when inflation rose above 1%.

     At the start of its aggressive easing in April 2013, the BOJ leadership

vowed to hit the 2% inflation target in about two years with massive asset

purchases. Inflation reached 1.5% in April 2014, excluding the direct impact of

the sales tax hike that month, but the plunge in crude oil prices in the summer

pushed the BOJ's effort to reflate the economy back to square one.

     The stubborn deflationary mindset among households and businesses and slow

wage hikes have stymied progress in lifting prices and inflation expectations.

The BOJ board has delayed the timeframe for achieving the 2% price target for

the sixth time, now aiming to reach the goal in fiscal 2019, four years later

than initially planned.

--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; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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