UPDATE: MNI POLICY: BOJ Wakatabe: Tax Hike May Weigh On Econ

--Adds Comments From Briefing, Backgrounds in Paragraphs 5-12

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

warned Thursday the consumption tax hike planned in October may push economic

activity and prices lower.

     Speaking to business leaders in Aomori City, northern Japan, Wakatabe also

noted that further attention must be paid to the "downside risks to the main

scenario".

     Wakatabe said the BOJ still had ammunition, citing QQE, a negative interest

rate policy, and forward guidance as future policy tools that the BOJ will take.

     However, he doesn't see any imminent additional easing, saying, "It is

appropriate to maintain the current policy framework in which it clearly commits

to the price stability target of 2% and pursue the monetary easing to achieve

the target."

     After the speech, Wakatabe told reporters that the BOJ has vowed to conduct

additional easy policy if the momentum toward achieving the 2% price target is

lost, although he sees no need to change the forward guidance for policy rates

now.

     "We continue to examine the degree of downside risks to economic activities

and prices at every monetary policy meeting and will act if needed without

hesitation as downside risks are large," Wakatabe said.

     Although not commenting directly on monetary policy by other central banks,

he said a rate cut by the Fed isn't important by itself to the BOJ, but it

needed to pay attention to the reason why the Fed cuts rate, if it happens. If

the Fed cited downside risks to the U.S. economy, the BOJ would need to take

heed, as Japan's economy faces similar downside risks.

     When asked about the recent drop in the 10-year Japanese government bond

yield, Wakatabe said, "The bond yield move is within the yield curve control

acceptable range. We should look at yield moves flexibly and don't see the need

of changing the policy framework."

     Increasing the monetary base is one available tool to achieve the 2% price

target. "The pace of increasing the monetary base could temporarily slow but the

BOJ commits to increase the monetary base based on overshooting commitment."

     The pace of increasing BOJ purchases of Japanese government bonds has been

falling as lower yields have enabled it to reduce the scale of its buying. The

10-year bond yield fell to -0.195% in mid-June, which is close to the lower end

of a range of -0.20% to +0.20% that the BOJ tolerates.

     JGB purchases recently fell below Y30 trillion for the first time since the

BOJ introduced the aggressive easy policy in April 2013. The BOJ policy allows

for buying JGBs at an annual pace of about Y80 trillion.

     In the speech, he also warned that persistent or prolonged trade friction

will add to the downward pressure on the global economy, not just through direct

effects from higher tariffs, but also through deteriorating sentiment in the

financial markets and slower corporate capex spending.

     "The global economic growth rate is projected to increase somewhat from the

second half of 2019 but this scenario entails substantial uncertainties," he

said.

     At the latest policy meeting on June 19-20, the BOJ left policy unchanged,

restating the forward guidance for policy rates, saying it will maintain the

easy policy "at least through around spring 2020", seeing Japan's economy

continuing to expand moderately despite growing downside risks.

     The next policy-setting meeting is scheduled for July 29-30 when the board

updates its quarterly Outlook Report, including economic growth and inflation

rate forecasts until fiscal 2021.

     Other key points from Wakatabe's speech:

     --Through Japan's battle against deflation and the U.S. and European

economies following the Global Financial Crisis, policy tools such as QQE,

negative interest rates and forward guidance have been added to the central

banks' "arsenal". "They will be used going forward depending on the situation." 

     --"If the slowdown in overseas economies becomes prolonged, downward

pressure on domestic demand may strengthen gradually. In addition, there remains

a risk that the scheduled consumption tax hike this October may push down

domestic demand and eventually economic activity and prices."

     --Wakatabe stuck to the 2% price target, saying, "Setting the target level

at 2% is a global standard; if we lowered the target, deflationary pressure

would be exerted through changes in people's expectations as well as in foreign

exchange rates and asset prices."

     --"Japan's economy has maintained its trend of moderate expansion, although

exports and industrial production have been affected by the slowdown in overseas

economies."

     --"The main scenario is that the economy is likely to continue expanding

moderately as a trend, with the growth rates of overseas economies rising

somewhat and domestic demand maintaining its firmness," he said.

--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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