MNI: UPDATE2: BOJ Iwata:Rapid Fiscal Austerity To Block 2% CPI

--Adds Comments From Briefing in Paragraphs 4-11

     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."

     Later, Iwata told reporters that it is up to the government to decide what

policy tools it should use to achieve fiscal consolidation.

     "The government needs to reduce the debt but it also needs to carefully

watch economic and inflation conditions when doing so," he said.

     Asked about the BOJ's failure to achieve 2% inflation even after nearly

five years have passed since the central bank began aggressive easing in April

2013, Iwata blamed not only the plunge in crude oil prices in 2014 but also

Japan's sales tax hike to 8% from 5% that year.

     "The tax hike resulted in lower consumer prices and inflation

expectations," he said, referring to the effect of a prolonged slump in

consumption, which has made firms cautious about raising retail prices.

     Iwata declined comment on whether the government should go ahead with its

plan to raise the sales tax further to 10% in October 2019.

     Asked about the recent dollar/yen exchange rate below Y109, down from Y113

about a month ago, Iwata said, "The depreciation of the dollar has been more

expected."

     He added that Japan is still far from achieving the 2% price target and

thus that the BOJ needs to maintain monetary easing.

     "I don't see the need to change the current yield curve, which is the most

appropriate one for achieving the 2% target. But looking ahead, if the economic,

price or financial market conditions changed, we would consider changing the

shape of yield curve," Iwata said.

     As for the conduct of monetary policy, Iwata maintained his view in his

speech, 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$$$$,MGJ$$$]