UPDATE2: BOJ Funo: Maintain Easy Policy To Hit 2% CPI Target

--Adds Comments From Briefing In Paragraphs 6-8

     SAPPORO, Japan (MNI) - The Bank of Japan must maintain its aggressive

monetary easing policy stance to achieve stable 2% inflation, which would create

room for lowering real borrowing costs when the economy slumps, BOJ board member

Yukitoshi Funo said Wednesday.

     At the same time, Funo urged the government to implement structural reforms

and firms to provide goods and services that match demographic changes while

financial conditions are kept very accommodative.

     In a speech to business leaders in Sapporo City, northern Japan, Funo

repeated the BOJ's latest outlook that the momentum toward 2% inflation is

maintained and consumer prices will show a higher year-on-year rise toward the

inflation target.

     "But the momentum still lacks strength and we are only half way toward

achieving the price stability target," he said.

     Therefore, it is important to "push ahead" with aggressive easing

comprising super-low interest rates and large-scale asset purchases.

     Later, Funo told reporters that business leaders reminded him that the

BOJ's controversial negative interest rate policy and the bank's dominance in

exchange-traded fund and government bond marks have unwanted side-effects.

     "This isn't new but some leaders voiced concerns over the side-effects of

easy policy, such as lower profit margins for financial institutions and reduced

functioning of financial markets," he said.

     Asked if the BOJ is worried about the side-effects, Funo said the central

bank could adjust monetary policy if necessary. "We can review our monetary

policy at every policy meeting," he said.

     In his speech, Funo repeated the BOJ's outlook that Japan s economy is

likely to continue its moderate expansion.

     He stuck to the official line that near-zero inflation is likely to rise to

2% "around fiscal 2019."

     "Looking ahead, compensation of employees is expected to increase

moderately and surpass the pace of nominal GDP growth in the second half of our

projection period through the end of fiscal 2019," Funo said.

     But he added that BOJ officials are watching the risk that companies will

remain cautious about wage hikes.

     Policymakers point out compensation of employees (wages multiplied by the

number of employees) has been rising along with a modest economic recovery but

it is mainly pushed up by a high pace of increase in lower-paid part-time and

contract workers amid labor shortages in some sectors. The year-on-year growth

in average wages remains low.

     At its latest policy meeting on July 19-20, the BOJ board decided to leave

its monetary policy unchanged in a seven-to-two vote, retaining the yield curve

control target it adopted in September last year, while pushing back its

estimate for achieving its 2% inflation target by a year until "around fiscal

2019."

     Since joining the nine-member board in July 2015, Funo has been following

the reflationary policy stance of Governor Haruhiko Kuroda.

     Funo also said the BOJ is targeting "sustainable" price stability, which

should be achieved with the help of efforts by various economic entities to

boost the economy's competitiveness and growth potential.

     "In order to reinforce competitiveness and the rate of growth, structural

reforms that will lead to a rise in productivity is required," he said.

     For their part, companies must adjust the supply of their goods and

services to match the latest trend in demand in light of a decline in the

working population, he said.

     A former Toyota Motor executive, Funo said both the manufacturing and

non-manufacturing sectors need to reduce mismatching or excessive workers,

equipment and inventories.

     To ease the pain of such a change, the government and the private sector

must implement growth strategies that will generate new demand and matching

supply, he added.

     "We have very accommodative financial conditions and a tight labor supply.

Now is a good time to push ahead with structural reforms and growth strategies,"

Funo said.

     The national average core CPI (excluding fresh food but including energy

prices) rose 0.4% on year in June for the sixth straight year-on-year rise.

     But excluding the upward pressure from energy prices, the underlying price

trend has shown a slow improvement. The CPI excluding fresh food and energy (the

core-core CPI) was unchanged on year in June, after being flat in May.

     Funo said that upward pressure on consumer prices is expected to increase

as the positive output gap widens.

     "Medium- to long-term inflation expectations have remained in a weakening

phase but some indicators have showed a rise in such expectations," he said,

repeating the BOJ's latest assessment.

     Firms are expected to become more willing to raise wages and prices as

demand continues to exceed supply in total domestic output while the inflation

outlook among households and businesses is expected to turn more positive as the

BOJ continues to show commitment to achieving 2% inflation through aggressive

easing, he said.

--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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