'Abenomics' architect calls for fresh BOJ easing, tax hike delay

[October 08, 2014]  By Tetsushi Kajimoto and Yuko Yoshikawa

TOKYO (Reuters) - The Bank of Japan needs to deploy additional monetary stimulus to increase the inflation rate to its target of 2 percent, a ruling party lawmaker and one of the architects of Prime Minister Shinzo Abe's reflationary policies said on Wednesday.

Abe's strategy aims to unshackle Japan's economy from the debilitating effects of 15 years of deflation, but annual core inflation - which excludes the effects of a sales tax hike in April - eased to 1.1 percent in August from 1.3 percent in July.

The sales tax increase also contributed to the economy's deepest slump in the second quarter since the 2009 global financial crisis.

"I hope the Bank of Japan would acknowledge that the situation is very alarming and take steps early," Kozo Yamamoto, a leading expert on fiscal and monetary policy in Abe's Liberal Democratic Party, told Reuters in an interview.

"Leaving things unattended would cause a delay in meeting the 2 percent goal," said the LDP lawmaker, who is regarded as close to Abe.

"Export growth has disappointed ... Consumption is falling, housing is slumping and drops in real wages are weighing heavily on households," Yamamoto said, urging the Bank of Japan to act.

Yamamoto's view contrasts with the central bank which maintains that the economy is on track to meet its 2 percent inflation target around the middle of fiscal year 2015.

Partly as a result of Abe's policies, the yen <JPY=> struck a six-year low of 110.09 to the dollar last week.

But Yamamoto said it would still be positive for the economy if the yen weakened to 110-120 per dollar. Rapid depreciation or weakening beyond this range, however, would do more harm than good, he added.

Yamamoto advocated delaying a second sales tax hike planned for next year until April 2017, warning that proceeding as planned would "damage the economy and ruin" Abe's pro-growth policies, dubbed "Abenomics".

Previously, Yamamoto had said the government should proceed with the second tax increase as planned and signaled no need for imminent BOJ easing, saying the bank's policy was "on track".

But Yamamoto said he has changed his view following a recent run of weak economic indicators.

Abe must decide by year-end whether to proceed with the planned tax hike to 10 percent next year, having raised it to 8 percent from 5 percent in April.

Yamamoto declined to say when and how the BOJ should ease, adding that specific steps are up to the central bank to decide.

The BOJ has stood pat since deploying an intense burst of stimulus in April 2013, when it pledged to achieve its 2 percent price goal in roughly two years via aggressive asset purchases.

There are rising concerns among Japanese firms about impact of a weak yen on the economy through higher import costs. But Yamamoto said a weakening of the currency to 110-120 yen would be natural and positive for exporters and a broader economy.

"Excessive yen weakening is undesirable and a rapid move would be problematic" even below 120 yen, Yamamoto said.

The yen traded at around 107.90 to the dollar on Wednesday.

(Editing by Chris Gallagher and Simon Cameron-Moore)

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