UPDATE: BOJ Kuroda: Need Above 2% CPI To Achieve Price Target

--Adds Details From Speech, Q&A, Background From 10th Paragraph

     NAGOYA, Japan (MNI) - Bank of Japan Governor Haruhiko Kuroda said Monday

the central bank will maintain its monetary easing stance until it has created

an environment in which people will believe that prices will rise about 2% every

year.

     At the same time, Kuroda warned that the BOJ must watch the side-effects of

large monetary stimulus on financial institutions' profits. At the moment, this

risk is "not significant," he added.

     "There is still a long way to go before achieving the price stability

target of 2%," Kuroda repeated in a speech to business leaders in Nagoya City,

central Japan.

     "Going forward, however, firms' stances are likely to gradually shift

toward raising wages and prices with the further improvement in the output gap,"

he said. "People's medium- to long-term inflation expectations are projected to

rise steadily as further price rises come to be widely observed."

     With the persistence of these positive developments, inflation will

steadily proceed toward the central bank's price stability target of 2%, he

added.

     "It is crucial that people actually experience inflation above 2% so that

the perception takes hold that prices of goods and services will tend to go up

every year by around 2%," Kuroda said, reminding of the BOJ's continued

commitment to allow CPI to overshoot the 2% target, if necessary, to ensure that

the general perception of stable inflation at that rate is well established.

     At its latest policy meeting on Oct. 30-31, 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 last year.

     In addition, recent weak price data prompted the board to lower its

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

its latest timeframe that it can achieve its 2% inflation target "around fiscal

2019" ending in March 2020.

     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%.

     Kuroda remains upbeat about the current economic climate, saying, "The

recovery has become more sustainable."

     Japan's growth has been led by both external and domestic demand in a

well-balanced manner and that the economic expansion has been spreading to a

wide range of economic entities, he said.

     The governor repeated the view shared by the BOJ and the government that

the biggest risk to growth and inflation is developments in overseas economies,

as has been in recent years.

     "Upside and downside risks to economic activity are generally balanced but

we will examine both risks thoroughly," he said.

     Japanese prices remain weak, giving a continued economic expansion, but

some bright factors will increase upward pressure on inflation, Kuroda said,

repeating his recent remarks.

     "Upward pressure on prices stemming from the rise in wage costs has been

mounting," he said. "It seems that consumers are gradually accepting price

rises."

     In addition, there's a positive view on price hikes in the stock market, he

said. In the past, markups were generally feared to hurt sales.

     "It appears that investors have started to consider the recent price rises

as positive developments. Among budget chain restaurants listed on the Tokyo

Stock Exchange, there have been some cases where the announcement of price rises

was received positively and stock prices increased sharply."

     But he added: "The specific timing at which each firms' stance shifts

toward raising prices is likely to vary, depending on developments in demand

that each firm and industry faces or on the extent of the rise in wage costs."

     "In this regard, there is a risk that a rise in inflation expectations will

lag behind if it takes time for firms' stances to shift toward raising prices

and price developments remain relatively weak," he said.

     In the question and answer session, Kuroda said, "The global economy is

likely to expand moderately."

     But he also said the uncertainty over the global economy is high and that

the BOJ must pay attention to developments and their impact on domestic growth.

     Business leaders in Nagoya said they would like to see stable foreign

exchange rates for stable business operations. 

     In response, Kuroda also said, "It is desirable that foreign exchange rates

should reflect economic fundamentals and move in a stable manner."

     The central banks in Japan, the U.S. and Europe are making efforts to

achieve stable 2% inflation, which is a global standard, he said.

     "Aiming to achieve the 2% price target will contribute to stabilizing

foreign exchange rates," Kuroda said.

     In his speech, Kuroda said the recent deprecation of the yen would keep

import costs higher, which in turn would exert upward pressure on domestic

prices. 

     Asked about the BOJ purchases of ETFs (exchange-traded funds), Kuroda said,

"ETF buying is part of the current easy policy framework."

     "Looking ahead, we may review the framework in the future. But I don't

think we need to review it at this point."

     The BOJ is currently buying about Y6 trillion of ETFs annually. Private

economists have said that the BOJ's ETF purchases have been distorting stock

prices and that the BOJ should consider lowering the scale of its ETF buying.

     After the Oct. 30-31 policy meeting, Kuroda told reporters that the bank's

ETF buying is aimed at lowering risk premiums and stimulating the economy. He

also noted that the balance of ETFs held by the BOJ accounted for only 3% of the

total volume of securities listed on the Tokyo Stock Exchange.

--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

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