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MNI: UPDATE: BOJ Iwata: Rapid Fiscal Austerity To Block 2% CPI

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     OITA, Japan (MNI) - Bank of Japan Deputy Governor Kikuo Iwata on Wednesday
warned against accelerated fiscal consolidation, noting the 2014 sales tax hike
caused a sharp drop in domestic demand, posing a threat to the BOJ's efforts to
push up inflation from zero to 2%.
     In a speech to business leaders in Oita City, southwestern Japan, Iwata
said it is important to achieve fiscal soundness in the longer term but that the
pace of fiscal austerity will have a large impact on the real economy.
     "If the government rushes to achieve fiscal soundness and accelerate the
pace of fiscal austerity, the growth rate will decline," he said. "If this
happens, fiscal soundness will not be achieved, and achievement of the (BOJ's)
price stability target of 2% also will become difficult."
     As for the conduct of monetary policy, Iwata maintained his view, saying,
"The BOJ deems it important to continue persistently pursuing powerful monetary
easing under the framework of quantitative and qualitative easing with yield
curve control."
     "Japan's economy is expanding moderately but prices are relatively weak.
Thus, there is still a long way to go to achieve the price stability target of
2%."
     He is known as a reflationary economist who has said that the BOJ should
increase monetary base to boost inflation expectations. However, the central
bank has shifted its focus to the bond yield curve and the level of interest
rates from the amounts of asset purchases.
     The five-year terms of the two BOJ deputy governors end on March 19.
     At its latest policy-setting meeting on Jan. 22-23, the BOJ board decided
in an 8-to-1 vote to maintain its current monetary easing stance under the yield
curve control framework it adopted in September in 2016.
     Under the yield curve control framework, the BOJ is seeking to stabilize
the 10-year government bond yield, the benchmark for long-term borrowing costs,
at around zero percent and keep the overnight interest rate at -0.1%.
     The BOJ board also maintained its medium-term growth and inflation
projections, repeating what many see as an optimistic outlook that the bank can
hit the inflation target "around fiscal 2019."
     Iwata said that the current monetary policy is the most appropriate policy
framework at present as it can have the largest possible positive effects and
the smallest possible side-effects.
     "The BOJ must keep seeking whether there is more appropriate monetary
policy, but unless the effectiveness of a new policy is assured, I think it
should continue with the current monetary policy," he said.
     Iwata said temporary factors, such as a reduction in charge for mobile
phone serves, are behind the slow pickup in consumer prices, but also noted that
fundamentally, it is because the mindset and behavior based on the assumption
that wages and prices will not increase easily have been deeply entrenched among
firms and households.
     Iwata believes that Japan can achieve the 2% price target "around fiscal
2019" as the mechanism of pushing up prices continues improving.
     "Prices of items such as processed food and daily necessities -- which are
responsive to economic activity -- are likely to rise gradually, and the yen's
depreciation to date is expected to push up prices of such items as durable
goods," he said.
     "The output gap improves further, firms' stance is likely to gradually
shift toward raising wages and prices, and the inflation rate is projected to
rise in line with wage increases."
     With these factors pushing up actual inflation, a virtuous cycle is
expected to operate in which people's inflation expectations rise accordingly,
leading to a further increase in actual inflation, he predicted.
     Iwata said Japan's economy is expected to expand moderately but added that
the biggest downside risk is developments in overseas economies.
--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
[TOPICS: MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MGJ$$$]

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