UPDATE 3-BOJ's Kuroda, confident on inflation, urges govt to raise tax again

Thu Sep 4, 2014 5:36am EDT

Related Topics

* BOJ leaves massive stimulus programme unchanged, as
expected
    * BOJ cuts view on housing investment, in nod to pessimists
    * No change to assessment that economy recovering moderately
    * Kuroda calls on govt to proceed with second sales tax hike
    * Weak yen isn't negative for Japan's economy -Kuroda

 (Adds Kuroda quotes, details)
    By Leika Kihara
    TOKYO, Sept 4 (Reuters) - Bank of Japan Governor Haruhiko
Kuroda urged the government to proceed with another sales tax
hike to fix its finances and, despite acknowledging some
weakness in the economy, remained confident the central bank
would hit its inflation target.
    A recent run of weak Japanese data, including a slump in
household spending and tepid factory output growth in July, has
cast doubt on the BOJ's view the economy will pick up steadily
after the pain inflicted by a first sales tax rise in April.
    "Exports and output are showing weak movements," Kuroda told
a news conference after a policy meeting on Thursday at which
the central bank left its huge monetary stimulus programme
unchanged.
    "But job and income conditions are improving steadily and
household confidence is firm. Companies, reflecting improving
earnings, are maintaining their bullish investment plans. A
positive economic cycle remains in place," he added.
    A former top currency diplomat, Kuroda said falls in the yen
were not necessarily bad for the world's third-largest economy,
shrugging off the concern of some analysts that further weakness
could hurt growth by pushing up import costs.
    He remained optimistic that the economy was gradually
pulling out of 15 years of deflation and was on its way to
hitting his 2 percent target for inflation sometime during the
next fiscal year beginning in April.
    However, the central bank cut its assessment on housing
investment and warned that factory output remained weak, a nod
to pessimists on its board who fret there may be only a modest
rebound in the economy after a big second-quarter contraction.
    Overall, the central bank maintained its view the economy
would continue its steady recovery, with consumption set to
benefit from a tightening job market that is pushing up wages.
    Kuroda said households would boost spending again once the
pain from the tax hike faded, suggesting no additional monetary
stimulus would be forthcoming any time soon.
    His optimism stands in contrast to growing doubts among
private-sector analysts that the economy can grow strongly
enough to see consumer price inflation, now around 1.3 percent,
accelerate toward the central bank's target.
    Some lawmakers are calling on Prime Minister Shinzo Abe to
delay a second sales tax increase scheduled for October 2015,
citing the bigger-than-expected hit from the first increase.
    Kuroda, however, warned that postponing it could undermine
market trust in Japan's finances and trigger a spike in bond
yields that would be hard to control with fiscal and monetary
policy tools.
    "It's very important for Japan's fiscal state and for its
economy that steady progress is made in efforts to restore
fiscal health," he said.
    The BOJ stuck with its "quantitative and qualitative easing"
framework, under which it has pledged to increase base money by
60-70 trillion yen ($571-$666 billion) per year through
aggressive asset purchases to reflate the long-moribund economy.
    
    POLITICAL MOMENTUM
    Offering some relief to policymakers, Japan's Nikkei stock
average hit a seven-month high this week on hopes that a cabinet
reshuffle by Abe on Wednesday would give fresh momentum to his
growth-oriented policies.
    Abe told reporters after the reshuffle that pulling Japan
out of chronic deflation remained his top priority and that a
decision on whether to proceed with the second increase in the
sales tax depended largely on data in coming months.
    Japan's economy shrank by an annualised 6.8 percent in the
second quarter, more than erasing a first-quarter surge in the
run-up to the sales tax increase. Analysts polled by Reuters
expected a 3.8 percent bounce this quarter.
    The BOJ is likely to cut its economic growth projection for
the current fiscal year when it reviews its long-term forecasts
in October, but it will keep its bullish price forecasts as a
tighter job market nudges up wages, sources say. 
    "The BOJ is saying that right now parts of the economy are
weaker than expected, but it still expects growth to accelerate
in the future," said Hiroshi Miyazaki, senior economist at
Mitsubishi UFJ Morgan Stanley Securities.
    "It is possible the BOJ will downgrade this fiscal year's
GDP forecasts, but as long as it expects healthy growth for next
fiscal year, I see no change to its policy stance."
    Exports have failed to pick up despite the boost from a weak
yen, disappointing BOJ officials and dragging on growth. Some
pundits thus argue that further yen falls may do more harm than
good by pushing up import costs for Japanese companies.
    Kuroda dismissed that view, adding that it was natural for
the yen to weaken against the dollar at a time when the BOJ was
keeping monetary policy ultra-loose but the U.S. Federal Reserve
was moving closer to raising rates.
 (1 US dollar = 105.0800 Japanese yen)

 (Additional reporting by Stanley White and Tetsushi Kajimoto;
Editing by William Mallard and Alan Raybould)
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