UPDATE 1-BOJ's Iwata: Aim to achieve 2 pct inflation as soon as possible

Wed Aug 28, 2013 3:26am EDT

* BOJ overhauled monetary policy in April to end deflation

* Economic data show BOJ policies starting to work

* Wages and capex lagging behind improvements in economy

By Stanley White

KYOTO, Japan, Aug 28 (Reuters) - Bank of Japan Deputy Governor Kikuo Iwata on Wednesday reiterated the central bank's goal of achieving 2 percent inflation as soon as possible with a two-year time frame in mind.

Iwata, in a speech to business leaders in Kyoto, also said the BOJ will continue its quantitative easing until inflation stabilises at 2 percent.

The deputy governor said that it may take a long time for monetary policy to work, so in the meantime the government needs to support growth with fiscal spending.

"Our goal is to achieve 2 percent inflation as soon as possible with a two-year timeline as a reference point," Iwata said.

"We are also focused on how we achieve 2 percent inflation. What we want to see is higher wages and an increase in capital expenditure contributing to our price goal."

The BOJ stunned markets by offering an intense burst of monetary stimulus in April, pledging to double the supply of money in two years by boosting purchases of government bonds and risky assets to end 15 years of deflation.

In doing so, it switched its policy target from the overnight call rate to base money, a broad measurement of the amount of money the central bank pumps into the economy.

The most immediate impact of the BOJ's quantitative easing has been an increase in inflation expectations, which has caused a rise in stocks and a decline in the yen, Iwata said.

This impact on asset markets is essential for the BOJ's policy to spread through the economy, because higher stock prices can spur consumer spending and improve corporate balance sheets, he said.

A weaker yen also boosts exports, which can then be a catalyst for more capital expenditure, Iwata said.

Recent gains in consumer spending and signs of an increase in capital expenditure plans are still not sufficient to say the economic recovery is in a virtuous cycle, he said.

The BOJ next meets on Sept. 4-5. At its previous meeting, the BOJ kept policy on hold and left its economic assessment unchanged as it awaits more clues on the strength of capital expenditure and employees' wages.

The BOJ's strategy rests on buying 7.5 trillion yen of long-term government bonds per month, roughly 70 percent of newly issued government debt.

The size of the BOJ's government debt purchases has raised concerns that the central bank could eventually end up bankrolling government spending.

However, the BOJ's commitment to a 2 percent inflation target should prevent concerns about financing government spending, Iwata said.

"If we thought that inflation would consistently overshoot our target, then we wouldn't buy debt even if the government requested us to do so," he said.

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