UPDATE: MNI POLICY: BOJ Wakatabe: Japan May Return to Deflat'n

--Adds Comments From Briefing in Paragraphs 4-9

     NIIGATA, Japan (MNI) - Bank of Japan Deputy Governor Masazumi Wakatabe

Wednesday voiced concern over the risk that Japan's economy may return to

deflation if the economy is hit by downward pressure.

     "Japan's inflation rate is improving steadily but it has remained at around

1%", therefore, "we are only halfway to achieving 2% inflation. In a case where

downward pressure is exerted on the economy again, it may revert to deflation,"

Wakatabe told business leaders in Niigata City.

     Wakatabe didn't see any imminent need for more easy policy now in the

speech.

     However, Wakatabe told reporters that the BOJ "should conduct additional

easy policy if needed without hesitation" but he didn't elaborate on how and

when the BOJ would conduct further easing as it would depend on economic and

financial conditions at that time.

     He also said that the BOJ "has more room" for further easing, although

there is the view that the BOJ is running out options to help lift the economy.

     Wakatabe also told reporters, "Downside risks to the economy are

increasing" but he didn't elaborate on how to cope with the situation, as policy

decisions are determined by the policy-setting meetings.

     "Unless the path toward achieving the 2% price target recedes," the BOJ

doesn't need to consider undertaking more easing, Wakatabe said, adding that

whether the path toward the 2% target is maintained or not is the criteria of

further easing.

     He added, "I recognize downside risks to inflation rates but it isn't as

serious as the BOJ needs to take additional easing now." "Growing downside risk

to inflation rates isn't my own view" and it is shared by other members, he

said.

     When asked about the side-effects of a prolonged easy policy, Wakatabe

said, "Financial environment is changing but the side-effects haven't been

materialized to the level that will prompt the BOJ to adjust the current easy

policy.

     Wakatabe, an advocate of the idea that monetary easing has no limits, said,

"The BOJ will encourage a rise in the inflation rate to the level that is

appropriate for the economy by continuing large-scale monetary easing with the

aim of achieving 2% inflation and thereby maintaining economic improvement for a

sufficiently long period."

     Other key points from Wakatabe's speech:

     --"Price declines may bring about significant negative effects on the

economy, even if their pace is moderate or does not accelerate."

     --"In continuing with monetary easing, it is necessary to continuously

examine not only the effectiveness on inflation but also the impact on the

financial markets and system." "This is expected to enhance the sustainability

of the policy and consequently raise the certainty of achieving 2% inflation."

     --The BOJ's momentary policy doesn't target foreign exchange rates and

Japan aims at achieving the same inflation rate as many other economies,

including the U.S. and the Eurozone. That is likely to stabilize foreign

exchange rates from a long-term perspective, and thereby contribute to

establishing a business environment that enables firms to make decisions easily

and continue with their activities without added concerns.

     --The impact of the trade friction between the U.S. and China on economic

activity at home and abroad is likely to be limited. "However, if problems

become more complex and prolonged, downward pressure on the global economy could

heighten, not only through the gradual spread of the negative effects on trade,

but also deterioration in firms' fixed investment stance and cautiousness in

financial market sentiment."

     --Japan's inflation rate is likely to rise gradually as the economy

continues on an expanding trend. But "there are various risk factors to the

outlook for prices."

     --"We cannot deny the possibility that actual wages and prices will not

rise easily, despite continued excess demand going forward." Even when wages and

price rise, "there is a possibility that such movements will be perceived as a

temporary phenomenon and people's inflation expectations will not rise,"

Wakatabe said.

     --"Moreover, the scheduled consumption tax hike in October 2019 poses

another risk for economic activity and prices," he added.

--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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