UPDATE2: BOJ Sakurai: Far From 2% Goal; Maintain Easy Policy

--Plays Down Any Imminent Need for Additional Easing

--Adds Backgrounds, Comments From Briefing in Paragraphs 4-9, 24-27

     HAKODATE, Japan (MNI) - Bank of Japan board member Makoto Sakurai said

Wednesday that Japan is still far from achieving its 2% consumer price target,

which the BOJ must take seriously, and so it is vital for the central bank to

maintain its current highly accommodative monetary policy.

     In a speech to business leaders in Hakodate City, northern Japan, Sakurai

said, "Price moves remain weak and there is a long way to go to achieve the 2%

price target and we need to take that fact seriously."

     However, Sakurai played down any imminent need of additional easing,

saying, "The economy is improving steadily and the process of moving toward the

target is improving steadily. It is vital to continue to pursue the aggressive

easing policy under the current policy framework.

     At a news conference after this speech, Sakurai brushed off an imminent

need of more easing, saying, "The now is the time to continue the current easy

policy and to watch its effects" on economic activity and prices.

     "The current yield curve control policy, which is focused on interest

rates, is enough to achieve the 2% price target," he added. 

     "If consumer prices, (which are improving steadily) rise further, the

effects of powerful easy policy will strengthen as real interest rates fall in

response to higher inflation rates," he told reporters. 

     He said he expects Japan's economy to continue to expand moderately but the

BOJ must watch carefully to see if the recovery is sustainable.

     "The sustainability of the economic expansion is a crucial issue for the

BOJ to achieve its 2% price target. As you said, if the economy loses steam, it

would be negative for economy and prices," Sakurai told the news conference. 

     However, he quickly added, "In addition to (the BOJ's) easy policy, the

economy is supported by public works spending and overseas demand. There is no

sign that the economy will slow down anytime soon as part of a cyclical move."

     Sakurai, seen as a strong supporter of the government's reflationary

policy, including the easy monetary policy championed by BOJ Governor Haruhiko

Kuroda, also said that the central bank should stick to its 2% price target,

judging from external and internal conditions.

     At the latest policy-setting meeting on Sept. 20-21, the BOJ board decided

in an 8-to1 vote to maintain its current monetary policy stance under the yield

curve control framework it adopted about a year ago.

     One of the two new board members, Goushi Kataoka, dissented, arguing

current policy was insufficient to meet the central bank's 2% policy goal by the

current target date of sometime in fiscal 2019, according to the BOJ's policy

statement following its meeting.

     Kataoka was quoted as citing "an excess supply capacity in capital stock

and the labor market" as the reason for his objection but the statement didn't

show any counter-proposals made by him.

     In July, the BOJ pushed back the timeframe for hitting the 2% inflation

target to "around fiscal 2019" from the previous estimate of "around fiscal

2018." It was the sixth delay since the bank began aggressive easing in April

2013.

     Kataoka also opposed the description of the board's inflation outlook.

     As for the 2% target that Japan hasn't achieved, Sakurai said at the

meeting with business leaders, "I think we should not change the target easily."

     He elaborated that Japan needs to keep consumer prices in positive

territory as consumer prices have an upward bias and BOJ's tools to fight

deflation are relatively limited as it is difficult for the BOJ to lower nominal

interest rates far below zero.

     Sakurai also said that a 2% stability target is a global standard.

     "Aimed at achieving a 2% price target along with central banks in [other]

industrialized nations would contribute to stabilizing foreign exchange rates

and eventually Japan's consumer prices," Sakurai said.

     Japan's core consumer price index (excluding fresh food but including

energy item) was up 0.7% on year in August and core-core CPI (excluding both

fresh food and energy items) was up 0.2% on year in August, both far below the

BOJ's target.

     Despite continued weak CPI moves, Sakurai was optimistic on the outlook for

the inflation rate.

     Sakurai noted that the economy's output gap, a key factor for determining

CPI, is improving steadily and has had positive impact on sentiment.

     Sakurai also told business leaders, "The improvement of wage hikes is

lagging the steady recovery of the economy" as firms remain cautious about

raising wages for regular workers.

     However, "looking ahead, Japan's economy is expected to expand moderately.

Upward pressure on wages will likely increase further in response to a further

tightness of labor market conditions."

     Sakurai argued that corporate efforts to increase their productivity is

behind the slow rise in wages.

     Sakurai said he believes that corporate efforts to cope with labor

shortages by business streamlining and worker-saving capital investment would

face limits, forcing them to consider higher wages. 

     "It is difficult to clearly pinpoint the timing of [when] the limits [would

be reached]," he said later at the news conference. "But I think the time is

approaching."

     At the news conference, Sakurai also noted the improvement in the output

gap. "The output gap continued to improve [in the second quarter] for the third

consecutive quarter, meaning that demand is exceeding supply and upward pressure

on prices are increasing."

     The BOJ estimated the country's output gap to be +1.22% in the April-June

quarter, rising from +0.75% in the first quarter of 2017 and +0.45% in the final

quarter of 2016.

     The BOJ expects the improvement in the output gap to eventually increase

upward pressure on consumer prices and inflation expectations, with a lag of a

few quarters.

     Sakurai in the speech to business leaders said that if corporate

price-raising activity expands on the back of solid private consumption,

consumers would accept higher prices, which in turn would enable firms to raise

their prices further.

     Raising the long-term economic growth caused by higher productivity would

increase national interest rates, which would strengthen the effect of the BOJ's

easy policy.

     "We should not be overly negative about the recent slow rises in wages and

prices, as Japan's economy is a process of implementing structural reforms,"

Sakurai said.

     "Personally, I think the economy is growing based on balanced supply and

demand, and both wages and prices are moving steadily in the right direction,"

he added.

     "The important issue for Japan is not to suppress the current favorable

moves. The BOJ needs to pursue its powerful easy policy, and the government and

private firms should continue to implement necessary measures that will

accelerate structural reform and strengthen economic growth," Sakurai said.

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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