* Board member Sato wants to manage price target with flexibility
* BOJ's Sato says low yields show markets approve of tax hike
* Some investors worry about economy after sales tax hike
* Economy to rebound quickly after tax hike, Sato says
By Stanley White
TOKYO, Feb 27 Bank of Japan board member Takehiro Sato said on Thursday the central bank can be flexible on the timing of an eventual exit from its monetary easing, a sign that simply reaching its 2 percent price stability goal will not trigger immediate action.
Sato also said he is confident that consumer prices can continue to rise as improvements in the output gap have a lagging impact on prices.
The central banker also stressed that the BOJ's economic forecasts anticipate volatile swings in demand caused by a scheduled increase in the sales tax, suggesting he sees little need to adjust policy in the short term.
"If the BOJ can judge that 2 percent will be sustainably achieved, it is possible to exit our policy before inflation actually reaches that level," Sato said after giving a speech to financial professionals.
"The BOJ can also continue quantitative easing after 2 percent inflation is reached if it judges that the gains are not sustainable."
The BOJ last week maintained its pledge of increasing base money, its key monetary policy gauge, at an annual pace of 60-70 trillion yen ($589 billion-$687 billion).
The BOJ has stood pat on policy since launching an intense burst of stimulus last April, when it pledged to accelerate inflation to 2 percent in roughly two years via aggressive asset purchases in a country mired in deflation for 15 years.
The government will increase the sales tax in April to 8 percent from 5 percent, and consumers have been buying cars, homes and durable goods before the increase, with growth in other consumer spending also driving industrial production.
Long-term bond yields are low now because investors view this tax hike as a proof of the government's commitment to fiscal consolidation, Sato said.
A PSYCHOLOGICAL BATTLE
When the BOJ does eventually exit its quantitative easing, bond yields could shoot up as Japan would be firmly out of deflation, Sato also said.
Sato declined to outline specific exit strategies, saying it's too early to debate such measures as the BOJ is still waging a psychological battle to lift inflation expectations and convincingly end deflation.
The BOJ is looking at a broad measure of prices, and not just Japan's core consumer price index, when it tries to measure the trend for inflation.
The sales tax hike will make measuring the price trend more difficult and the central bank will need to monitor the situation for several months, Sato said.
The economy is likely to contract in the April-June quarter as consumer spending falls sharply after the sales tax hike takes effect on April 1.
However, Sato said he was confident that growth would resume in July-September as the economy and financial system are stronger than they were when Japan last raised the sales tax in 1997.