REPEAT: BOJ Masai: Maintain Easing Toward 2% Inflation Target

     MATSUYAMA, Japan (MNI) - The Bank of Japan must continue implementing

monetary easing to secure the path toward its increasingly evasive 2% inflation

target and inform the public what is preventing the bank from reaching the goal,

board member Takako Masai said Thursday.

     In a speech to business leaders in Matsuyama City, western Japan, Masai

said she is aware of the criticism of the central bank as it has delayed its

estimated timing for reaching the target several times since it began aggressive

easing more than four years ago.

     "The bank certainly aims to achieve the price stability target of 2% at the

earliest possible time, and the delay in such timing is not desirable," she

said.

     "However, what I believe is important for the bank is -- in the event that

the 2% price stability target cannot be achieved due to economic and price

developments at the time -- to thoroughly explain the reasons behind the target

not being achieved and to implement monetary policy so that the economy will

follow a path toward the target."

     She added that the policy framework of inflation targeting is also expected

to "perform the role of a communication tool."

     Later, Masai told a news conference, "It is vital for the BOJ to maintain

the 2% inflation target."

     She defended the points often made by Governor Haruhiko Kuroda that the BOJ

must have a safety margin against upward bias in CPI statistics and the risk

that the economy would slip back into deflation.

     "What I think is the most important reason is that the 2% inflation target

is a global standard," she added.

     BOJ officials have said that if Japan were to  targets a lower inflation

rate, such as 1%, while other major economies aim to keep inflation around 2%,

the notion that the BOJ would provide comparatively less monetary stimulus could

cause the yen appreciate, hurting exporter profits as well as pushing down

import costs, and thus consumer prices.

     "It's not appropriate to change the 2% price target," Masai said. "I think

Japan can achieve the 2% inflation target around fiscal 2019, as projected by

the board."

     However, some economists and former BOJ board members are skeptical about

the achievement of the 2% target anytime soon.

     Takahide Kiuchi, who was among the last dissenting voices on the BOJ's

policy board, had repeatedly said that the 2% target was too high during his

five-year term that ended in July.

     "If the favorable inflation rate is determined by the economy's growth

potential, which is estimated somewhere between 0.5% and 1%, the corresponding

inflation must not be 2%, which is too high. I think it is even below 1%,"

Kiuchi, currently executive economist at Nomura Research Institute, told MNI in

a recent interview

     Asked about how the BOJ will respond to growing geopolitical risks

highlighted by tensions over North Korea's nuclear weapons program, Masai told

reporters, "We stand ready to take all possible measures, such as increasing

liquidity not only to stabilize financial markets but also to maintain the

stability of the settlement system."

     As for maintaining a specific asset purchase goal in BOJ policy statements

even though it is no longer the policy target, Masai said, "I see no problem

about keeping the wording of about Y80 trillion, with regard to the annual pace

of the BOJ's Japanese government bond purchases."

     "The scale of our JGB purchases fluctuates, depending on market conditions,

as the BOJ is buying JGBs for the purpose of forming the yield curve" that is

consistent with the achievement of the 2% inflation target, she said.

     In her speech, Masai repeated the bank's official line that there are

brighter spots in the economy that are likely to turn around the stubborn

deflationary mindset among households and businesses.

     "There is still a long way to go to achieve the price stability target of

2%. Nevertheless, my view is that the momentum toward achieving the target has

started to steadily increase."

     Masai joined the nine-member BOJ policy board in June 2016 after serving as

an executive officer overseeing market research at Shinsei Bank.

     At its latest policy meeting on July 19-20, the BOJ board decided to leave

its monetary policy unchanged in a seven-to-two vote, retaining the yield curve

control target it adopted in September last year, while pushing back its

estimate for achieving its 2% inflation target by a year until "around fiscal

2019." It was the sixth delay since April 2013 when the bank launched aggressive

easing.

     Among the brighter spots in the economy, Masai noted base wages have

largely continued to rise for two years, even though the rise has been modest.

     The latest government data show base wages, the key to a recovery in total

cash earnings per employee, rose 0.5% in June from a year earlier, the third

straight year-on-year rise and the 11th gain in the past year. On an annual

basis, base wages rose 0.2% in calendar 2016, the second consecutive increase

after +0.3% in 2015.

     As base wages have been rising steadily at small businesses, which employ

70% of the workforce, a clearly increasing number of households can now feel

that their wages actually have been rising, Masai argued.

     "This is highly important in terms of raising people's inflation

expectations," she said.

     Masai also pointed to a "growing impetus" toward raising productivity, due

in part to labor shortages.

     "Investment that serves a positive purpose -- such as that in

efficiency-improving and labor-saving machinery and equipment, and in research

and development for growth areas -- is expected to further rise, and this will

likely contribute to improving productivity," she said.

     The BOJ's initiatives to maintain highly accommodative financial conditions

and ensure the overcoming of deflation will continue to foster positive

developments among firms, she added.

     "In my view, this will lead to improvement in productivity and ultimately

to a rise in the potential growth rate," she said.

     As for the yield curve control policy that the BOJ adopted last September,

Masai said, "The current framework ... is designed to amplify monetary easing

effects when the outlook for economic activity and prices improves."

     "In that case, there would be upward pressure on interest rates in

accordance with such improvement. The degree of monetary easing will increase if

the BOJ contains such upward pressure and thereby maintains the shape of the

yield curve."

     Masai said a rise in women's labor participation rate would help ease

severe labor shortages in some sectors that are missing out on business

opportunities or facing rising labor costs.

     "Japan's economy currently faces severe labor shortages, and a worsening of

this situation is inevitable amid the further decline in the working-age

population," she said. "Women continue to constitute a considerably large

potential labor force."

     "In addition to the impact on labor supply of women's participation in the

workplace, improving firms' competitiveness through the promotion of such

participation will become more important," Masai added.

     In the process of promoting women's participation in the workplace,

business efficiency has improved by reducing long working hours and promoting

labor-saving investment, she said.

     The Organisation for Economic Co-operation and Development estimates that

if women's labor participation rate in Japan were to remain the same over the

next 20 years, the labor supply would contract by 17%, she noted.

     But if women's participation rate were to converge with that of men over

the next 20 years, the fall in labor supply would be limited to 5% and as a

result, Japanese GDP would increase by almost 20% over the two decades, she

said, quoting the OECD's estimate.