August 31, 2017 / 1:58 AM / a year ago

BOJ's Masai says economy gathering enough momentum to hit price target

MATSUYAMA, Japan (Reuters) - Bank of Japan board member Takako Masai said she is confident that the economy is getting closer to achieving the bank’s elusive inflation target, countering market views that slow wage growth and fragile consumption will constrain price growth.

FILE PHOTO: People cross a street in front of high-rise buildings in the Shinjuku district in Tokyo, Japan, September 29, 2016. REUTERS/Toru Hanai/File Photo

Geopolitical risks, such as escalating tensions over North Korea, could hurt household and corporate sentiment if they jolt financial markets, though no such damage was seen for now, she said.

“What would be worrying is for geopolitical risks to trigger market turmoil and hurt sentiment,” Masai told reporters on Thursday after meeting business leaders in Matsuyama, southwestern Japan.

“That’s a risk we’re keeping an eye out for. But recent data has shown some encouraging signs” on corporate and consumer spending, she said.

Masai said Japanese companies were likely to boost investment to increase productivity as they faced labor shortages in a tightening job market, noting that the BOJ’s policy to cap borrowing costs would assist in this effort.

“It’s true there is some distance to achieving our 2 percent inflation target. But I believe the (economy’s) momentum towards achieving the target is strengthening,” Masai said in a speech to business leaders in Matsuyama.

Masai said it was “unfortunate” that the BOJ had been forced to delay the expected timing for achieving its inflation target.

“But what’s important is to explain the factors behind the delay and pursue policy to lay the groundwork for achieving 2 percent inflation,” she said.

A steady rise in household income and the tightening job market will boost domestic demand, helping inflation accelerate toward the BOJ’s target, she added.

Japan’s economy expanded at the fastest pace in more than two years in the second quarter as consumer and company spending picked up, but price pressures have been negligible.

Core consumer inflation remained stubbornly low at just 0.5 percent in July from a year earlier, forcing the BOJ to push back the timing for meeting its price target last month. It now expects inflation to hit its target by March 2020.

Masai rebuffed calls by some analysts to lower the BOJ’s price target, saying that doing so could destabilize markets.

“An inflation target of 2 percent has become a global standard among major central banks,” she said. “The fact many countries share roughly the same level of inflation target helps stabilize exchange-rate moves and financial markets.”

Under a policy framework adopted last year, the BOJ has pledged to guide short-term interest rates to minus 0.1 percent and the 10-year government bond yield to around zero percent.

It has also been continuing to buy large amounts of government bonds in an attempt to stimulate the economy.

Reporting by Leika Kihara; Editing by Chang-Ran Kim and Eric Meijer

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