UPDATE: MNI: BOJ Harada: 2% CPI Needs Even Lower Unemployment

--Adds Comments From Briefing in Paragraphs 3, 6-7

     KANAZAWA, Japan (MNI) - Bank of Japan board member Yutaka Harada on

Wednesday warned against a premature tightening of highly stimulative monetary

conditions, repeating his view that the already low unemployment rate must fall

further to help push up the below 1% inflation rate toward the bank's stable 2%

target.

     In his speech to business leaders in Kanazawa City, central Japan, Harada

defended the large-scale easing that the BOJ launched in April 2013, saying it

is not causing excessive lending or investment at this point.

     Later he told a news conference, "I think the costs of monetary easing are

smaller than its benefits."

     He also denied that the nearly flat yield curve based on the bank's target

of the -0.1% overnight lending rate and the zero 10-year bond yield is not the

main cause of low profitability at Japanese banks but said it is due to low

demand for borrowing as many firms have large cash reserves.

     "If the bank were to indeed raise interest rates, bond and stock prices

would decline and the yen would appreciate, leading to a deterioration in firms'

profits, and credit costs would increase, so that private banks would suffer

substantial damage," said Harada, a former government economist who believes

reflationary policy measures should boost prices.

     Asked about the BOJ's "inflation-overshooting commitment," under which it

will continue monetary easing until inflation is firmly anchored around 2%, even

if gains in the core CPI (excluding fresh food) overshoot that level for a time,

Harada told reporters, "There is a good chance that the inflation rate will rise

too far above 2%."

     "We may reduce the degree of easing even before we achieve 2% inflation if

we can confirm that the inflation rate will reach 2%," he said.

     The key points from Harada's speech:

     -- "In my view, prices are influenced by a variety of factors; what is

important is that the mechanism through which prices rise works well, and policy

decisions should be made in line with developments in this mechanism. In other

words, additional monetary easing might be necessary if inflation loses

momentum, but otherwise the current policy should be maintained."

     -- "Since there is room for further increases in employment and production,

the bank needs to continue with the current monetary policy measures in order to

achieve the price stability target of 2%. Needless to say, it is essential that

the bank continues to constantly monitor for signs of financial imbalances, but

for now, the likelihood of such imbalances is small.

     -- To achieve the level of inflation seen in 1992, which was 2.2% in the

core-core CPI (excluding fresh food and energy), the unemployment rate has to

remain at its May 2018 level of 2.2%. "I think that the current unemployment

rate needs to fall further in order to achieve the price stability target of

2%."

     The unemployment rate in 1992 stood at 2.2%, but the proportion of young

people was higher at that time, Harada noted. Given that the unemployment rate

among the young is usually higher, and that among the middle-aged is usually

lower, the estimated unemployment rate for 1992 is 1.9% if it is adjusted based

on the demographic structure in 2017, he explained.

     -- "I am not saying that monetary easing should continue until the

unemployment rate has fallen to 2%. In conducting monetary policy, the bank

should pay close attention to price developments, and past observations on the

link between prices and the unemployment rate should be regarded merely as

supplementary information to help with making appropriate monetary policy

decisions."

     -- The yield curve steepened at the start of aggressive monetary easing in

April 2013. It is probably because easing was recognized as having a positive

effect on inflation expectations and economic activity. "Thus, whether the yield

curve flattens or steepens when short-term interest rates are raised depends on

the economic situation as well as the market's view of monetary policy at the

time. It is therefore wrong to think that if short-term interest rates are

raised, the yield curve will steepen."

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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