UPDATE: MNI POLICY: BOJ Harada: October Sales Tax Hike a Worry

--If Further Policy Needed, BOJ Won't Hesitate to Act

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

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

Wednesday warned that the consumption tax hike planned for October could push

the economy into recession.

     "If the economy deteriorates to the extent that achieving the 2% price

stability target in the long term becomes difficult, I view it as necessary to

strengthen monetary easing without delay," Harada told business leaders in

Nagasaki City.

     When asked about the possible policy options, Harada cited interest rates,

quality, quantity, and lengthening the period of the forward guidance for policy

rates without elaborating on them.

     Harada told reporters, "We cannot say and assess that Japan's economy is

recovering based on the latest GDP data as the GDP was mainly boosted by the

drop in exports and the rise in inventories."

     "Japan's economy is in a delicate stage now" as there is the risk that

Japan's economy falls into recession due to the consumption tax hike, Harada

said.

     Japan's economy posted an unexpected second straight gain in the

January-March period, up 0.5% on quarter, or an annualized +2.1%, boosted by

stronger net exports and firm private demand, preliminary GDP data released

Monday by the Cabinet Office showed.

     The data came in much stronger than the MNI's survey median forecast for a

growth of -0.1% q/q, or the annualized forecast of -0.2%. The growth in the

first quarter followed a Q4 rise of 0.4% Q/Q, or an annualized +1.6%.

     In his speech, Harada emphasized the importance of achieving the 2% price

target and also brushed off calls for normalization of the easy policy.

     The BOJ board at the April 24-25 policy meeting decided to clarify its

stance of maintaining the current power easy policy, saying the BOJ will keep

extremely low interest rates "at least through around spring 2020."

     On forward guidance, board member Harada, a former government economist,

dissented, arguing that it was appropriate to further clarify its relationship

with the price stability target.

     Other key points from Harada's speech:

     --"Domestic demand such as business fixed investment and consumption has

withstood the decline in external demand and production. However, it also is

true that downside risks to the economy are increasing. The impact of the

consumption tax hike scheduled for October this year also is a concern."

     --The provision of free education and a reduction in mobile phone-related

prices will delay the timing of achieving the 2% price target. But Harada said,

"I am not too pessimistic."

     --They will increase people's real income. "It likely will take time for an

increase in real income to induce an increase in actual demand but this will not

hamper the achievement of the 2% price stability target itself."

     --"Aiming at achieving zero percent inflation entails the risk of actually

aiming for deflation, given the upward bias of the CPI."

     --"The equilibrium interest rates - which are achieved in the long run -

tend to be lower on a nominal basis when the aim is zero percent inflation. That

being the case, there will be virtually no room for lowering interest rates

should the economy fall into recession."

     --The 2% price target is the global standard. "Given that other major

countries aim at achieving 2% inflation, if Japan were they 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 stabilizing foreign

exchange over the long term."

     --"The buffer theory should be interpreted as raising interest rates after

confirming that price increases have gained enough momentum."

     --Terminating the zero rate policy in 2000 and the quantitative easing in

2006 was a "major failure." "If interest rates were raised immediately in Japan

now, the spread between short- and long-term interest rates likely would be

reversed."

     --"I think that deterioration in banks' profitability actually is caused by

the structural problem that they are accumulating deposits despite there being

no borrowers."

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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