Japan government adviser: not worried about temporary slowdown in inflation

[February 17, 2015] By Stanley White and Yuko Yoshikawa

TOKYO (Reuters) - A slowdown in Japanese inflation due to falling oil prices is not a problem and the Bank of Japan does not have to strictly adhere to the two-year time frame for its inflation target, said a member of the government's top advisory panel.

It is up to the BOJ to examine its price target and decide whether or not further monetary easing is needed, said Susumu Takahashi, a member of the Council on Economic and Fiscal Policy (CEFP).

A gradual decline in the yen will not harm Japan's economy because this benefits companies operating overseas, but an excessively rapid decline is unwelcome, he said.

Takahashi's comments, which come one day before a BOJ policy decision, suggest the government is comfortable with a temporary slowdown in inflation and relaxed about the yen's moves in the currency market.

"Falling oil prices are positive for the economy," Takahashi told Reuters.

"A weak yen is also a plus. There isn't much need to worry about the current slowdown in inflation."

Abe's government regularly adopts proposals from Takahashi and other private-sector members on the CEFP, which gives them influence over economic policy.

The BOJ is expected to keep monetary policy on hold at a two-day meeting ending on Wednesday, but slowing inflation and surprisingly tepid gains in consumer spending are a problem for Japan's central bankers. [ID:nL4N0VM3JQ]

Takahashi agrees with the BOJ's base line scenario that inflation will pick up again later this year as companies and households reap the windfall from a collapse in oil prices.

Real incomes will start rising after April, which will also help consumer spending, said Takahashi, an academic who is chairman at the Japan Research Institute.

When the BOJ launched quantitative easing in 2013, Governor Haruhiko Kuroda set a two-year time frame to achieve 2 percent inflation to prevent Japan from returning to deflation.

However, underlying inflation slowed to 0.5 percent in December, making the time frame look unrealistic.

"It's up to the BOJ to decide (the time frame)," said Takahashi.

"But generally speaking, you don't have to strictly cut it off at two years."

One of the CEFP's tasks is to devise a plan to repair Japan's public finances. The plan is due sometime around June.

The government has already admitted that it will not meet its target of returning to a primary budget surplus in fiscal 2020, which excludes debt servicing costs and bond sales.

The best way to do so is to focus on spending cuts and measures to expand economic growth, Takahashi said.

The government will raise the nationwide sales tax to 10 percent from 8 percent in 2017, but it must draft its fiscal discipline plan assuming it will not be able to raise taxes again, he said.

Japan's debt burden is the worst among industrialized economies at more than twice the size of its $5 trillion economy, but successive governments have delayed cutting debt in part because bond yields remain very low.

(Editing by Jacqueline Wong)

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