Reuters US Economy
By Leika Kihara
TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda said the central bank is aiming for moderate inflation accompanied by wage rises and economic improvement, signalling that its goal aligns with Prime Minister Sanae Takaichi's focus on reviving growth.
Moreover, giving voice to the Takaichi administration's view that it was premature for the central bank to raise interest rates, Finance Minister Satsuki Katayama said inflation has yet to sustainably hit the BOJ's 2% target.
"The government hopes the BOJ conducts monetary policy so that inflation stably and sustainably moves around 2%. We haven't seen this happen yet," Katayama told parliament on Thursday, adding that Japan did not need to worry much about the risk of too-high inflation.
The remarks highlight the political barrier the BOJ will face in proceeding with a rate hike the governor had signalled could happen as soon as December.
Speaking in the same parliament session, Ueda said domestic consumption is resilient with a tight job market pushing up pay, and sustaining a moderate cycle of rising wages and inflation.
While rising raw material costs were lifting food prices, a gradual economic recovery was leading to price rises for other goods and services, Ueda said.
"When we look at underlying inflation that strips away temporary factors, it is gradually accelerating toward our 2% target," Ueda said, suggesting that Japan was making progress in meeting the conditions for raising interest rates.
"The BOJ is aiming to achieve moderate inflation accompanied by rising wages, with improvements in the economy increasing consumption and capital expenditure," Ueda said.
TAKAICHI'S POLICY PREFERENCES COMPLICATE BOJ'S TASK
The BOJ last year ended a decade-long, massive stimulus deployed under former governor Haruhiko Kuroda that was part of deceased premier Shinzo Abe's "Abenomics" stimulus package.
It then raised short-term rates twice to 0.5% by January, but has kept borrowing costs steady since then to assess the economic impact of higher U.S. tariffs.
The BOJ's efforts to bring rates closer to levels neutral to the economy, which analysts estimate to be between 1% and 1.5%, have been complicated by the inauguration of premier Takaichi, an advocate of expansionary fiscal and monetary policy.
Her administration has pledged to roll out a big spending package to cushion the economic blow from rising living costs.
She also filled seats in key government panels with reflationists who favour looser fiscal policy backed by low rates such as former BOJ deputy governor Masazumi Wakatabe.
Yield on Japan's super-long government bonds rose to a near one-month high on Wednesday on market concerns over Takaichi's spending plans. The yen also fell against the dollar and euro on expectations the BOJ will go slow on future rate hikes.
The Japanese currency was little changed at 179.32 per euro in Asia on Thursday, having dipped to a record low of 179.47 overnight. It was steady at 154.82 per dollar after sliding to a nine-month low of 155.05 on Wednesday.
A weak yen pushes up import costs and accelerates the very inflation Takaichi is trying to contain. Verbal warnings by the finance minister on Wednesday failed to keep yen falls in check.
The new administration's big spending plan is also inflationary as it works to boost demand, some analysts say.
"Market fears Takaichi's aggressive spending would worsen Japan's finances are pushing down the yen, which in turn accelerates inflation and hurts households," said former BOJ board member Takahide Kiuchi.
"This is a big contradiction and weakness of the Takaichi administration's fiscal policy."
(Reporting by Leika Kihara; Editing by Muralikumar Anantharaman and Shri Navaratnam)
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