MNI UPDATE2: BOJ Harada Says Labor Not Firm Enough To Up Wages

--Updates With Remarks From Briefing Throughout

--If BOJ Maintains Policy, Japan Economy To Grow, Boosting Wages and Prices

     FUKUSHIMA, Japan (MNI) - Labor shortages in Japan are not serious enough

yet to boost wage and prices but if the Bank of Japan maintains its current

large-scale monetary easing program, it should raise economic growth and lead to

higher wages and prices, BOJ board member Yutaka Harada said Thursday.

     He also told business leaders in Fukushima City, in northeastern Japan,

that the central bank may incur losses when it eventually exits from its

aggressive easing but added that the losses would not cause a major blow to the

economy.

     The former government economist also repeated the bank's official line that

targeting an inflation rate below the 2% level the BOJ considers a global

standard among major central banks would cause the yen to appreciate and so have

a negative impact on firms.

     Later at a news conference, Harada said the current monetary policy

targeting a nearly flat yield curve and super-low interest rates is having a

highly stimulative effect on the economy without hurting financial institutions'

intermediation function.

     "The current monetary policy is having a sufficient effect on achieving 2%

inflation. In the event of an external shock that makes it insufficient, I think

we would have to conduct additional easing," he said.

     He declined to say what specific easing tools could be used in that event

but said one way would be to expand the existing policy framework.

     Asked if the BOJ would act to ease if the yen appreciates beyond the recent

range of Y100 to Y120 to the dollar, Harada replied that the central bank is

"not applying monetary policy to a certain yen exchange rate."

     The local business community asked for a flexible monetary easing policy,

not necessarily pushing for 2% inflation, Harada said.

     "But I do think it is important to pursue 2% inflation," he said.

     Harada said he is often questioned why wages and prices have not risen

despite labor shortages.

     "My answer is simply that labor shortages have been insufficient. If

current monetary policy is maintained, labor shortages will intensify further as

the economy improves, and there will be a phase in which both wages and prices

increase," he said, without projecting exactly when this is likely to happen.

     Later at the news conference, Harada was asked if monetary policy alone can

help achieve the BOJ's 2% price stability target, while ignoring various issues,

such as labor unions focusing on job security and improving working conditions,

instead of pushing for higher wage hikes, and the fact that labor market reform

is not making much progress.

     "I think it is highly possible to raise nominal wages by monetary policy,"

he said.

     "To raise real wages, we need to see higher labor productivity," he said.

"In order for labor productivity to rise, monetary policy alone would not work.

The (government's) growth strategy must succeed, deregulation in a broad sense

including free trade must proceed and the economy must regain vitality."

     Recently, productivity has risen as monetary easing has created labor

shortages, prompting firms to reallocate human resources to more profitable

areas, he said. The BOJ's monetary easing has also stabilized the economy,

giving a sense of security to firms when they invest in new equipment, which has

made their operations more efficient, he added.

     "I think it (monetary easing) is making some contribution to raising real

wages," he said.

     Asked under what conditions he could say labor shortages were sufficient,

Harada replied that the unemployment must fall to around 2.5% from the current

2.8% and the positive output gap must widen to about 2.5 percentage points from

the BOJ's estimate of 1.2 percentage points in Q2 and the Cabinet Office's

estimate of 0.5 percentage point in Q3.

     But he also noted the challenging situation -- the jobless rate "is not

falling easily from 2.8%," stuck  that level in the past four months through

September after falling from 3.1% in June, because the labor participation rate

is rising.

     Labor shortages are good for workers because firms are trying to improve

severe working conditions, Harada said. For employers, the current combination

of tightening labor supply with firmer demand for goods is better than labor

abundance with low demand.

     If the momentum of wages and prices "is strong enough, the bank will start

reducing the level of monetary easing," he said.

     "Some argue that there will be dangers associated with an exit from

monetary easing as the bank heads toward reducing the level of monetary easing,

but as I have explained, there are no such dangers."

     In October, weak price data prompted the BOJ policy board to lower its

projections for consumer prices in fiscal 2017 and 2018, but the BOJ stuck to

its estimate that it could achieve its 2% inflation target "around fiscal 2019"

ending in March 2020.

     That estimate had been delayed by one year in July, the sixth delay in the

inflation target date since the BOJ began its very accommodative easing policy

in 2013.

     Judging from the past experience in Japan, Harada said, unless the positive

output gap exceeds 2.5 percentage points (larger demand vs. supply), the

inflation rate will not reach 2%.

     "It can be concluded that, if inflation rates continue to rise at about

1.5% and the output gap rises to about 2.5 percentage points, then 2% inflation

will be achieved," he said, adding the current output gap is in the range of 1.0

to 1.5 percentage points.

     When the BOJ begins its exit from aggressive easing sometime in the future,

it BOJ will have to raise interest rates, possibly by abandoning the negative

interest rate policy and raising the interest rate applied to excess reserves,

or by selling its holdings of Japanese government bonds, Harada said.

     But he quickly added that "at this point in time, the BOJ has not reached

any decisions on an exit policy."

     "I consider that the bank may register losses on its statement of income at

the exit from monetary easing, but believe that nothing negative will happen to

the economy," he said.

     If prices rise, interest rates will also rise eventually, which means it

will be possible to purchase higher yielding JGBs, Harada pointed out.

     Until then, the bank will have to hold low-yielding JGBs while paying high

yields to banks to prevent an overheating of the economy, he said.

     "However, in the end, the central bank will always make a profit in the

long run, since it buys high-yielding JGBs using cash and current account

deposits that carry almost no costs, he argued.

     "Thus, the bank will not make a loss in the long run that could pose a

danger," he concluded.

     Among reasons the BOJ should target 2% inflation, Harada said, aiming at

zero inflation "entails the risk of actually aiming for deflation, given the

upward bias of the consumer price index."

     Second, the equilibrium interest rates -- which are achieved in the long

run -- tend to be lower on a nominal basis when the aim is zero inflation, he

said. "That being the case, there will be virtually no room for lowering

interest rates should the economy fall into recession.

     "In order to avoid this, it is necessary to provide a so-called buffer for

nominal interest rates by raising the inflation rate. What is more, inflation

can be dealt with by raising interest rates, and thus inflation can be

considered to be easier to deal with than deflation," he said.

     Harada is known to support the reflationary policy approach under Prime

Minister Shinzo Abe, believing massive asset purchases and cash injections into

the banking system should reflate the economy toward sustained growth and higher

inflation.

     Also arguing against a lower inflation target is the practice of central

banks in other developed economies, he said, "Given that other major countries

aim at achieving 2% inflation, if Japan were the only country with a lower

target, this would result in an appreciation of the yen, which would create

turmoil in firms' investment plans."

     "If Japan maintains the same inflation rate as other countries, I feel that

this will serve to stabilize foreign exchange over the long term."

     The yen's exchange rate against the U.S. dollar since the introduction of

QQE (quantitative and qualitative easing) in 2013 with the 2% inflation target

has moved in the range of Y100 to Y120 and appears to be roughly stable at

around Y110, Harada observed.

     "I think that this situation can be described as stable, taking into

account that the yen rose from Y120 to Y80 against the dollar around the time of

the 2008 financial crisis," he said.

--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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