* BOJ's QQE prevents not just deflation but excessive
* Adds rising inflation expectations help prevent sharp yen
* Govt must not delay structural reforms to boost growth
(Adds quotes, details)
By Leika Kihara
TOKYO, May 26 Bank of Japan Deputy Governor
Kikuo Iwata signalled on Monday the possibility of withdrawing
the central bank's massive monetary stimulus if the economy
overheats and nudges up inflation well above its 2 percent price
Iwata voiced confidence that Japan was making steady
progress in meeting the central bank's inflation goal with
prices rising not just because of a weak yen, which inflates
import costs, but strength in domestic demand.
He also said heightening inflation expectations in Japan
would help prevent excessive rises in the yen, which had weighed
on the export-reliant economy during 15 years of deflation.
While he stressed the BOJ's resolve to maintain ultra-loose
monetary conditions for as long as needed to beat deflation,
Iwata said the central bank's current stimulus programme also
aims to prevent excessive inflation.
"The BOJ's current policy intends to prevent not just
deflation but inflation from well exceeding 2 percent, such as
to 4 percent or 5 percent, for a medium- to long-term period,"
Iwata told a seminar.
"If the economy overheats and inflation exceeds 2 percent on
a permanent basis, we will adjust policy," he said. "On the
other hand, if our price goal is distant and prices don't seem
to be approaching the target, we will adjust policy the other
way" by expanding stimulus, he added.
Since deploying its "quantitative and qualitative easing"
(QQE) programme in April last year, the BOJ has remained silent
on when it could consider withdrawing the stimulus for fear of
diluting its message that it is determined to end nearly two
decades of economic stagnation.
Iwata's comments, the first from a senior BOJ official
directly mentioning the chance of withdrawing QQE, reflects the
growing confidence within the central bank that Japan is winning
the battle against deflation.
The BOJ has repeatedly said the economy is recovering
strongly enough for consumer inflation to hit its 2 percent
target by around April next year, when its two-year time frame
for meeting the goal expires.
While core consumer inflation has reached 1.3 percent in
March, market players remain sceptical on whether price gains
will accelerate from here as quickly as the BOJ predicts.
Still, the BOJ's optimistic view of the economy and prices
have led market players to scale back expectations of imminent
Iwata said that while the BOJ will support the economy by
stimulating demand, it was the government's job to boost Japan's
long-term growth potential by implementing structural reforms.
Economic growth will remain subdued even if the BOJ achieves
its price target, unless the government proceeds with structural
reforms, he warned.
(Additional reporting by Stanley White; Editing by Chris
Gallagher and Jacqueline Wong)