Weaker yen post-Fed would give BOJ more policy latitude: Abe adviser

[December 08, 2015]  By Kaori Kaneko and Sumio Ito

TOKYO (Reuters) - The Bank of Japan will have more latitude to maintain its current policy stance if a Federal Reserve interest rate rise triggers a sell-off in the yen, a key economic adviser to Prime Minister Shinzo Abe said on Tuesday.

"The BOJ should wait and see the effects of a U.S. tightening," Koichi Hamada, Special Adviser to the Cabinet, told Reuters.

"The BOJ would not need to ease policy if the yen heads towards 130 yen to the dollar," he said.

A weaker yen, resulting from Japan's aggressive monetary policy easing, has helped boost exporters' profits and share prices but also hurt households by driving up import costs.

A divergence in Fed and BOJ policy could push the yen past a 13-year low of 125.86 per dollar marked in June, a Reuters polled showed. It was trading at 123.03 per dollar at 0907 GMT.

The Fed is expected to raise U.S. interest rates for the first time in almost a decade at its policy meeting next week and gradually raise them further in 2016.

Hamada, an emeritus professor of economics at Yale University, also said Abe's policy mix has had the intended impact on the economy, driving an improvement in the jobs market.

"Basically, I think 'Abenomics' had its intended effect with its monetary policy-oriented approach," he said.

Japan's unemployment rate has fallen to a multi-year low and a weaker yen has helped push corporate profits to record highs but persistently low prices remain a challenge for policymakers.

Hamada said the BOJ should aim to reach a 2 percent inflation target that excludes energy and fresh food costs, as reflected in a new index the central bank recently started to publish, rather than a broader index that includes energy prices.

The world's third-largest economy dodged recession in the third quarter with the initial estimate of a contraction upwardly revised to an annualized expansion of 1.0 percent, offering a glimmer of hope for policymakers struggling to end years of stagnation.

Japan is set to cut the corporate tax rate to 29.97 percent in the 2016 fiscal year that begins in April and further trim it in coming years in a bid to spur business investment and growth, government and ruling party sources told Reuters.

The government cut the corporate tax rate to 32.11 percent in the current fiscal year from last year's 34.62 percent.

But Hamada said Japan should reduce the corporate tax rate boldly to compete with other nations.

"Tax reduction should not be done piecemeal when there's competition among countries... Japan should go below Europe, ideally below China, Korea and England, if not as low as Singapore," he said.

"Some form of audacious and courageous tax reduction is needed."

Asked if government pressure on Japanese firms to use their record cash piles to raise wages was appropriate, Hamada said it was "unusual" but such persuasion may be needed to change an entrenched corporate culture of holding cash instead of investing after prolonged economic stagnation.

(Additional reporting by Chang-Ran Kim; Editing by Sam Holmes and Jacqueline Wong)

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