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UPDATE 1-BOJ's Sato says no need to forestall tax hike pain with more easing

Leika Kihara
Tuesday, 3 Dec 2013 | 10:22 PM ET

* BOJ has departed from incremental approach-Sato

* Adds easing again may be counter-productive

* Repeats inflation target should be flexible one

* Sato is among dissenters to BOJ's rosy projections

HAKODATE, Japan, Dec 4 (Reuters) - Bank of Japan board member Takehiro Sato said he saw no need to expand monetary stimulus pre-emptively to counter the pain to the economy from next year's sales tax hike, seeking to dispel speculation of a near-term expansion of its ultra-easy policy. Even if the BOJ had tools remaining to expand stimulus, doing so could be counter-productive after having deployed all possible steps in a single blow in April, said Sato, who is among those in the board who are more pessimistic about prospects for achieving the central bank's inflation target. "The BOJ has broken away from the incremental approach (on monetary policy)," Sato told business leaders in Hakodate, northern Japan, on Wednesday. "This is the time to carefully monitor the policy effects, taking into account future economic and price conditions." The BOJ has kept monetary policy steady after stunning financial markets in April by pledging to double base money via aggressive asset purchases to achieve 2 percent inflation in roughly two years. Expectations that the BOJ will maintain its ultra-loose policy longer than other major central banks, and may even expand it again, have bolstered Tokyo share prices and pushed down the yen to a six-month low against the dollar. The BOJ sees no need for immediate action but its bureaucrats are pondering options in case pressure for further stimulus heightens next year, when the economy takes a hit from a national sales tax hike and prices lose support from the weak yen that is now pushing up import costs. Sato and fellow board member Takahide Kiuchi have publicly doubted that 2 percent inflation can be specifically achieved in two years. Many private-sector analysts also see the BOJ's timeframe as too ambitious for a country mired in deflation for 15 years. The former private-sector economist was among the three board members who dissented to the BOJ's rosy projections in October, calling for the price target to be watered down. Sato repeated his view that the BOJ's target should be considered a flexible one with certain allowance for deviations, given it was difficult to keep inflation rigidly at 2 percent due to uncertainty over how the effect of monetary policy appears on the economy. He also voiced scepticism on whether consumer inflation, now nearing 1 percent, can sharply exceed that level because companies may increase wages only temporarily and there was no guarantee the BOJ's massive stimulus will heighten public expectations that prices will keep rising. "There's high uncertainty on whether short-term price rises will affect medium- to long-term inflation expectations," he said. Sato stuck to the BOJ's baseline view that Japan's economy is recovering moderately, adding that he did not expect next year's sales tax hike to cause a steep downturn in growth. He stressed the BOJ should not expand stimulus unless Japan is hit by a severe shock of a scale matching the euro zone debt crisis or the collapse of Lehman Brothers. "My understanding is that downside risks (that will warrant further BOJ action) ... do not concern such trivial matters as a small divergence from our economic and price forecasts," Sato said.