MNI POLICY: BOJ Sakurai: Should Prepare for Contingency

     KOBE, Japan (MNI) - The Bank of Japan should carefully consider the impact

of any further easing in monetary policy as it assessed the speed of the

economic downturn, BOJ Board member Makoto Sakurai said on Wednesday.

     Speaking to business leaders in Kobe City, Sakurai said the BOJ should

understand the influence of the global slowdown on the domestic Japanese economy

and the impact - both positive and negative - of a prolonged period of

accommodative monetary policy.

     "Even if the slowdown in overseas economies strengthens and if negative

effects on Japan's economy materializes, policy action would be necessary," he

said.

     "But (the BOJ) should decide on policy after examining the degree of

negative impact and the speed at which it would filter through to the economy".

     At the latest policy meeting on October 30-31, the BOJ left policy

unchanged, rejecting the chance to take some insurance and take pre-emptive

policy action as it maintained the view that the recovery was continuing.

     The BOJ did, however, tweak its forward guidance, indicating that it would

tolerate policy rates moving below the current levels.

     "As for the policy rates, the BOJ expects short and long-term interest

rates to remain at their present or lower levels as long as it is necessary to

pay close attention to the possibility that the momentum toward achieving the

price stability target will be lost," the BOJ said in October.

     The previous forward guidance was that the BOJ would maintain the current

easy policy "at least around spring 2020."

     Other key points from Sakurai's speech:

     --If Japan is hit by a big shock, such as a Lehman Brothers type event,

decisive policy action would be necessary. Meanwhile, if the slowdown in

overseas economies remains modest, its impact on Japan's economy would also be

modest.

     --The BOJ should pay great attention to the side-effects of prolonged easy

policy on the financial system.

     --The BOJ must carefully examine developments in economic and price

conditions for the next six months, as a pick-up of the global economy is

unlikely before mid-2020.

     --It is necessary for the BOJ to keep a positive output gap in order to

maintain upward pressure on prices. Sakurai warned that if the slowdown in

overseas economies was greater than expected, the positive output gap would

return to negative territory. This would increase the risk of Japan's economy

returning to deflation.

     --It is vital for the BOJ to manage monetary policy in an appropriate

manner, while carefully assessing the side-effects of more easing.

     --The BOJ also needs to carefully examine the impact of the sales tax hike

on Japan's economy.

     --Sakurai expects Japan's exports will not recover immediately, but said

domestic demand should remain solid. 

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

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