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 Akira Amari's comments come after the government agreed to a $27
billion stimulus package and a $797 billion draft budget for next
fiscal year that politicians hope will shift economic growth into a
higher gear.
Amari also said the government needs to see the economy shake the
spell of deflation for it to be able to increase the sales tax in
2017, raising speculation the government is looking for a way to
wriggle out of fiscal tightening.
Policymakers have been caught in a trap of their own making with the
central bank's self-imposed price target becoming unworkable and the
government's commitment to a higher sales tax out of step with
efforts to reflate the economy.
"If consumer prices were rising more than 1.5 percent then I don't
think you could complain when talking about the price target," Amari
said.
Bank of Japan Governor Haruhiko Kuroda launched a bold quantitative
easing programme in April 2013 to lift consumer inflation to 2
percent in around 2 years. The BOJ determined both the price target
and the timeframe on its own.
Since then, the BOJ has pushed back the target timeframe three times
due to falling oil prices and slow consumer spending. The BOJ now
expects to meet this target around the second half of fiscal
2016/17, but even this seems unlikely.
Earlier on Tuesday the government released economic forecasts
showing it expects consumer prices to rise 1.2 percent in fiscal
2016/17, highlighting the difficulty the BOJ faces.
Kuroda has recently said the timing of the price target depends on
oil prices. Combined with Amari's comments, this shows policymakers
are looking for wriggle room as policy options become limited.
"Amari's comments will have a big impact because this will lessen
expectations for quantitative easing," said Norio Miyagawa, senior
economist at Mizuho Securities.
"The message from the government is that the BOJ doesn't have to try
too hard."
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The BOJ's debt purchases under quantitative easing are harming bond
market liquidity, so it may not be able to expand the policy
further, some economists say.
The government is scheduled to raise the nationwide sales tax to 10
percent from 8 percent in 2017, and some politicians are worried
because a sales tax increase in 2014 triggered a recession.
The tax hikes are part of a multi-party agreement to secure more
funding for welfare spending, but this clashes with Abe's pledge to
boost domestic demand and lift the economy out of deflation.
A stimulus package approved last week could potentially soften the
fiscal contraction caused by the sales tax hike.
The package is funded with extra tax revenue, which is seen as good
for fiscal discipline because the public debt burden is about twice
the size of Japan's $5 trillion economy.
However, the government regularly bases its budgets on a modest
estimate for tax revenue and looks for ways to spend the money that
comes in above its estimate.
(Editing by Eric Meijer and Sam Holmes)
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